This may be excessively optimistic on my part, but there seems to be a slow change in the way the world thinks about reserve currencies. For a long time it was widely accepted that reserve currency status granted the provider of the currency substantial economic benefits. For much of my career I pretty much accepted the consensus, but as one starts to think more seriously about the components of the balance of payments, it is clear Keynes wad right in his call for a hybrid currency when he recognized that once the reserve currency was no longer constrained by gold convertibility, the world needed an alternative way to prevent destabilizing imbalances from developing. On the heels of Treasury Economist Kenneth Austin and former-Obama chief economist Jared Bernstein discussing the end of the USD as a reserve currency, Michael Pettis summarizes 10 reasons the USD's reserve status has become an 'exorbitant burden'.
Despite 2nd Slowest Income Growth In 2014, Spending Rises Most Since March Driven By Subprime, Car SalesSubmitted by Tyler Durden on 09/29/2014 08:38 -0400
Mission releverage accomplished. Personal Income rose 0.3% in August (very slightly below Bloomberg's median estimate), the 2nd slowest growth of the year. Personal spending however jumped 0.5%, beating the 0.4% expectations, and its equal best growth since March. What was spending focused on? Why autosales, which accounted for about half of the spending. And what funded this spending? Why subprime car loans of course; it sure wasn't the real disposable income per capita which was a paltry $37,684 in August.
"Washington is absolutely correct, in my opinion, to want to boost American consumption, but the Fed seems to be trying to boost consumption by igniting another asset bubble in the hopes that, like before 2007, Americans will feel “richer” and so will consume more. This isn't sustainable, however, and will leave us, as Paul and Druckenmiller fear, even more heavily indebted and more dangerously exposed to the underlying weakness in demand."
Judging by the just released personal income and spending data, consumers are already forecasting a long, harsh winter. With incomes and outlays expected to rise by 0.3% and 0.2% respectively, the July data was a big dud, missing on both expectations, and while income rose by a modest 0.2%, far below the 0.5% in June, it was personal spending which in fact declined by 0.1%, a major drop from the 0.4% increase in the prior month, and the first outright decline in spending since January. As CNBC's Steve Liesman explained the disappointing data: "weather."
The ragged Keynesian excuse that all will be well in Japan once the jump in the consumption tax from 5% to 8% is fully digested is false. Here’s the problem: this is just the beginning of an endless march upwards of Japan’s tax burden to close the yawning fiscal gap left after the current round of tax increases, and to finance its growing retirement colony. There is no possibility that Abenomics will result in “escape velocity” Japan style and that Japan can grow its way out of it enormous fiscal trap. Instead, nominal and real growth will remain pinned to the flatline owing to peak debt, soaring retirements, a shrinking tax base and a tax burden which will rise as far as the eye can see. Call that a Keynesian dystopia. It is a cautionary tale for our times. And Japan, unfortunately, is just patient zero.
During the last 64 months “buying the dips” has been a fabulously successful proposition. So yesterday’s 2% dip will undoubtedly be construed as still another buying opportunity by the well-trained seals and computerized algos which populate the Wall Street casino. But that could be a fatal mistake for one overpowering reason: The radical monetary policy experiment behind this parabolic graph is in the final stages of its appointed path toward self-destruction.
For the third month in a row, personal spending missed Bloomberg's median expectation. However, as incomes rose 0.4% in June so spending also rose 0.4% - its best MoM rise in 3 months. The biggest MoM rise was in energy goods and services (+1.67% MoM - the biggest rise this year) - hardly the things sustainable recoveries are built on. The personal savings rate was flat MoM at 5.3% - the same 'peak' level it hit in the middle of 2013.
Sometimes, with the stock market doing its best imitation of the Energizer bunny, we forget just how extraordinary are the times in which we live. We’ve been lulled to sleep by the relentless and mesmerizing march higher of stocks and all manner of risky assets. Maybe it’s just that having lived through two booms and busts already that people have come to believe that another boom in risky behavior is not just the new normal but the old one as well. And having survived the last two busts, none the wiser apparently, everyone figures we’ll survive the next one too. Maybe. Or maybe people just don’t realize how truly weird things are right now. Some suggest there is no reason prices can’t continue to go higher; however, the supply of greater fools however is not unlimited and at some point reality and rationality will return, likely with a vengeance.
The Great Depression did not represent the failure of capitalism or some inherent suicidal tendency of the free market to plunge into cyclical depression - absent the constant ministrations of the state through monetary, fiscal, tax and regulatory interventions. Instead, the Great Depression was a unique historical occurrence - the delayed consequence of the monumental folly of the Great War, abetted by the financial deformations spawned by modern central banking. But ironically, the “failure of capitalism” explanation of the Great Depression is exactly what enabled the Warfare State to thrive and dominate the rest of the 20th century because it gave birth to what have become its twin handmaidens - Keynesian economics and monetary central planning. Together, these two doctrines eroded and eventually destroyed the great policy barrier - that is, the old-time religion of balanced budgets - that had kept America a relatively peaceful Republic until 1914. The good Ben (Franklin that is) said,” Sir you have a Republic if you can keep it”. We apparently haven’t.
The economic releases of the past few days are putting the lie to the Keynesian escape velocity myth. The latter is not just around the corner—-and 2014 is now virtually certain to mark the fifth year running when the boom predicted by Wall Street economist at the beginning of the year fizzled as actual results unfolded.
Abe's honeymoon is over. Following nearly two years of having free reign to crush the Japanese economy with his idiotic monetary and fiscal policies - but, but the Nikkei is up - the market may have finally pulled its head out of its, well, sand, and after last night's abysmal economic data from Japan which saw not only the highest (cost-push) inflation rate since 1982, in everything but wages (hence, zero demand-pull) - after wages dropped for 23 consecutive months, disposable income imploded - but a total collapse in household spending, the USDJPY appears to have finally been dislodged from its rigged resting place just around 102. As a result the 50 pip overnight drop to 101.4 was the biggest drop in over a month. And since the Nikkei is nothing but the USDJPY (same for the S&P), Japan stocks tumbled 1.4%, their biggest drop in weeks, as suddenly the days of the grand Keynesian ninja out of Tokyo appear numbered. Unless Nomura manages to stabilize USDJPY and push it higher, look for the USDJPY to slide back to double digits in the coming weeks.
When "justifying" the abysmal Q1 GDP print, one after another economist has scrambled to explain that this number is irrelevant, due to a spending halt during the "harsh winter", following which the US consumer has been spending like mad in Q2, and the PCE, which in Q1 was an abysmal 1.0%, and the worst since 2009, is set for a major rebound. Well, guess what: after last month's huge miss (originally -0.1% now revised to 0.0%, on expectations of a 0.2% rise), the month of May - the second month of Q2 - just showed that US consumer still refuses to spend. In fact, while personal income came in line with expectations in the month of May, rising 0.4%, same as expected, and disposable income in current dollars rising by $56 billion to $12,877 billion, it was spending which missed for the second month in a row and the 4th miss in the past 6 months rising only 0.2%, half the expected 0.4%! This was the fourth spending miss in the past six months.
Financially speaking, Japan is fast becoming a Keynesian dystopia. Its entire economy is now hostage to a fiscal time bomb. Namely, government debt which already exceeds 240% of GDP and which is growing rapidly because even the recent traumatic increase in the sales tax from 5% to 8% does not come close to filling the fiscal gap. Moreover, even at today’s absurdly low and BOJ rigged bond rate of 0.6% nearly 25% of government revenue is absorbed by interest payments. Now comes the coup de grace, as Kyle Bass predicted, Japan’s savings rate has collapsed and its vaunted current account surplus is about ready to disappear.
What Q2 GDP Surge? After March Spending Spree, Tapped Out Consumers Had Biggest Spending Drop Since 2009Submitted by Tyler Durden on 05/30/2014 09:04 -0400
Last month, when we noted the massive surge in Personal Spending which was funded entirely by the depletion of personal savings, we said that "since spending was so much higher than income for one more month, at least according to the bean counters, the savings rate tumbled and at 3.8% (down from 4.2% in February), was the second lowest since before the Lehman failure with the only exception of January 2013 after the withholding tax rule changeover. So for all those sellside economists who are praying that the March spending spree, funded mostly from savings, will continue into Q2 (because remember March is in Q1, which as we already know had an abysmal 0.1% GDP growth rate), we have one question: where will the money come from to pay for this ongoing spending spree?" Turns out the answer was... nowhere.
Bottom line: for whatever reason, in Q1 the US economy contracted not only for the first time in three years, but at the fastest pace since Q1 of 2011. It probably snowed then too.