A VoxEU Course Companion

Teachers of intermediate macroeconomics will find this new book of interest:

This Vox EU Course Companion, the first in the series, is a collection of carefully selected Vox columns designed to supplement Mankiw’s Macroeconomics textbook. Vox Course Companions provide relevant examples of economic theory in action and offer thought-provoking perspectives on arguments that come up time and again in exam-style questions. They bring together analyses of economic phenomena by leading economists as they happened, while applying and comparing the suitability of competing economic theories.

Got $70 Trillion? The Rise of Shadow Banking

The latest IMF Global Financial Stability Report has some interesting findings about the state of shadow banking, defined by the IMF as "financial intermediaries or activities involved in credit intermediation outside the regular banking system, and therefore lacking a formal safety net." In particular, there are debates about its size due to measurement issues and its consequent implications for--you guessed it--global financial stability. I am particularly struck by Figure 2.3 depicted above which purports to be a simplified representation but has my head spinning. At any rate, what follows are summaries of the findings. For the most part, regulatory arbitrage and the growth of investible funds at a time of loose money policies are driving the phenomenon in the developed world:

• Although shadow banking takes different forms around the world, the drivers of shadow banking growth are fundamentally very similar: shadow banking tends to flourish when tight bank regulations combine with ample liquidity and when it serves to facilitate the development of the rest of the financial system. The current financial environment in advanced economies remains conducive to further growth in shadow banking activities [i.e., low interest rate environments coupled with official intervention in capital markets].
• Most broad estimates point to a recent pickup in shadow banking activity in the euro area, the United States, and the United Kingdom, while narrower estimates point to stagnation. Whereas activities such as securitization have seen a decline, traditionally less risky entities such as investment funds have been expanding strongly.
• In emerging market economies, shadow banking continues to grow strongly, outstripping banking sector growth. To some extent, this is a natural by-product of the deepening of financial markets, with a concomitant rise in pension, sovereign wealth, and insurance funds.
• So far, the (imperfectly) measurable contribution of shadow banking to systemic risk in the financial system is substantial in the United States but remains modest in the United Kingdom and the euro area. In the United States, the risk contributions of shadow banking activities have been rising, but remain slightly below precrisis levels. Our evidence also suggests the presence of significant cross-border effects of shadow banking in advanced economies. In emerging market economies, the growth of shadow banking in China stands out.
• In general, however, assessing risks associated with recent developments in shadow banking remains difficult, largely because of a lack of detailed data. It is not clear whether the shift of some activities (such as lending to firms) from traditional banking to the nonbank sector will lead to a rise or reduction in overall systemic risk. There are, however, indications that, as a result, market and liquidity risks have risen in advanced economies (see also Chapter 1).
• Overall, the continued expansion of finance outside the regulatory perimeter calls for a more encompassing approach to regulation and supervision that combines a focus on both activities and entities and places greater emphasis on systemic risk and improved transparency. A number of regulatory reforms currently under development try to address some of these concerns (see Annex 2.4). This chapter advocates a macroprudential approach and lays out a concrete framework for collaboration and task sharing among microprudential, macroprudential, and business conduct regulators.

My general interpretation is that the banks are always a step ahead of the regulation game in which "more transparency" is always being asked for. Once they manage to comply, the banks are already onto another set of new financial instruments that skirt these regulations. Basel IV...Basel V, Basel VI, etc., soon follow. It is an essential characteristic of capitalism to constantly seek better returns, and if this involves moving into grey areas, banks will naturally do it.

Shifting Debts: The Gold Standard: Both Good and Necessary

In response to Reader Question on a Credit-Based Society: Can Interest Ever Be Repaid? I received an email from reader Keith Weiner at Monetary Metals.

Keith writes

Hi Mish,

I hope all is well.

I liked your reply to the reader question. I think it boils down to one thing. With fiat money, there is no extinguisher of debt. Debts are paid using dollars, but the dollar is itself a debt. The dollar is just a bite-sized piece of the Treasury bond. Paying a debt with a debt merely shifts it around.

The debt must rise exponentially, by at least the accrued interest, and more if the government wants what passes for growth.

The Gold Standard Institute is sponsoring an event in NYC on Nov 1. I will be talking about this problem, and numerous others that plague the dollar.

Would you be willing to share the link on your site? It's for a good cause that I think is near to your heart as well. :)

Thanks so much for whatever you can do.

Best Regards,
Keith

Keith is one of the good guys. If you are in the area, the conference should be well worth attending.

Date: November 1, 2014
Time: 1:00 to 5:00pm on
Place: The 3 West Club, Midtown Manhattan
Cost: $50 (click here to register)

Conference Link: The Gold Standard: Both Good and Necessary.

You are cordially invited to join us for a presentation of ideas you won’t get anywhere else. The gold standard is the monetary system of the free market—of capitalism. Advocates of the gold standard should make the clear connection from gold to freedom, and from freedom to self-interest. Advocates of freedom should understand the destruction wrought by the dollar, and it’s not simply rising prices.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

What Do Treasury Yields Say About Job Expectations, Inflation Expectations, and the Recovery?

Curve Watcher's Anonymous notes some interesting reactions in the treasury bond market following a string of good job reports.

Today the jobs numbers once again beat expectations: Nonfarm Payrolls Rose by 248,000 and the unemployment rate fell to 5.9%.

In seven out of the last eight months, jobs rose by over 200,000. Last month was the exception, but even then, the initial job report was revised up 69,000 to +180,000.

In light of such purportedly strong data, especially with the Fed tapering ending this month and expectations across the board of fed hikes, yield on the long bond should be rising.

The yield curve also should be steepening, at least if one believes in the recovery. Let's take a look to see what is actually happening.

30-Year Treasury Yield



Note: The above chart is off by a factor of 10. At the time I snapped that chart, the 30-year treasury yield was 3.143%

Yield on the 30-year long bond shot up on the job report but is now in the red for the day. This is not what one would expect following a strong jobs report.

Nonetheless, one day does not prove much. Let's take a look at the 5-year and 30-year treasuries over time.

30-Year and 5-Year Treasury Yields Since 2010



click on any chart for sharper image

The long-term trend since 2010 has been a gentle flattening of the curves.

Moreover, since the beginning of the year the spread between 30-year and 5-year treasuries has decreased significantly as the following chart shows in detail.

Treasury Spread 30-Year Minus 5-Year



The above chart shows weekly closes. The last data point is from September 26.

At the end of the day, the spread will be a bit lower than shown above. I currently have the spread at 1.396 (3.133 on the 30-year minus 1.737 on the 5-year), down about 10 basis points this week.

Instead of the curve steepening as one would expect in a recovery, the 5-30 spread curve has been declining since hitting a peak of 3.0 in November of 2010.

Conclusion

The bond market does not think much of an ongoing recovery or future price inflation prospects, and neither do I.

By the way, I occasionally get asked "Who is Curve Watcher's Anonymous?" The answer is me.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Nonfarm Payrolls 248K; Unemployment 5.9%; Employed +232K; Labor Force -97K

Initial Reaction

The payroll survey shows a net gain of 248,000 jobs vs. an expectation of 215,000 jobs. Last month was revised up by 69,000 to 180,000. The six-month string of plus 200,000 jobs remains broken.

Last month the household survey had a gain in employment of only 16,000. That number was not revised up.

This month the household survey shows a respectable gain of 232,000, pretty much in line with the establishment survey.

Nonetheless the household survey over the past six months has been much weaker than the establishment survey. One or the other is apt for some serious revisions.

The labor force fell by 97,000. Those not in the labor force increased by 315,000. This follows  last month's increase of those not in the labor force of 268,000.

The civilian labor force rose by 217,000. It would take that increase in employment to hold the unemployment rate steady.

Thus, the unemployment rate fell by 0.2% primarily on the basis of people dropping out of the labor force.

All things considered, this was a pretty strong report.

BLS Jobs Statistics at a Glance

• Nonfarm Payroll: +248,000 - Establishment Survey
• Employment: +232,000 - Household Survey
• Unemployment: -329,000 - Household Survey
• Involuntary Part-Time Work: -174,000 - Household Survey
• Voluntary Part-Time Work: +35,000 - Household Survey
• Baseline Unemployment Rate: -0.2 at 5.9% - Household Survey
• U-6 unemployment: -0.2 to 12.0% - Household Survey
• Civilian Non-institutional Population: +217,000
• Civilian Labor Force: -97,000 - Household Survey
• Not in Labor Force: +315,000 - Household Survey
• Participation Rate: -0.1 at 62.7 - Household Survey

Additional Notes About the Unemployment Rate

• The unemployment rate varies in accordance with the Household Survey, not the reported headline jobs number, and not in accordance with the weekly claims data.
• In the past year the working-age population rose by 2,278,000.
• In the last year the labor force rose by 389,000.
• In the last year, those "not" in the labor force rose by 1,889,000
• In the past year, the number of people employed rose by 2,330,000 (an average of 194,1677 a month)

Please note that over the course of the last year, the working-age population rose by more than the number of people employed. In normal times, the unemployment rate would have gone up slightly. Instead, the unemployment rate fell from 7.2% to 5.9%.

Over 100% of the decline in unemployment in the past year is due to people dropping out of the labor force, rather than strength in employment!

September 2014 Employment Report

Please consider the Bureau of Labor Statistics (BLS) July 2014 Employment Report.

Total nonfarm payroll employment increased by 248,000 in September, and the unemployment rate declined to 5.9 percent, the U.S. Bureau of Labor Statistics reported today. Employment increased in professional and business services, retail trade, and health care.

Click on Any Chart in this Report to See a Sharper Image

Unemployment Rate - Seasonally Adjusted



Nonfarm Employment January 2003 - September 2014



click on chart for sharper image

Nonfarm Employment Change from Previous Month by Job Type



Hours and Wages

Average weekly hours of all private employees rose by 0.1 hours to 34.6 hours. This was the first increase in seven months. Average weekly hours of all private service-providing employees also rose by 0.1 hours to at 33.4 hours.

Average hourly earnings of production and non-supervisory private workers was flat at $20.67. Average hourly earnings of production and non-supervisory private service-providing employees was flat at $20.46.

Last month numbers appear to have been revised lower by $0.01 as last month I reported production and non-supervisory private at $20.68 and service-providing at $20.47.

For discussion of income distribution, please see What's "Really" Behind Gross Inequalities In Income Distribution?

Birth Death Model

Starting January, I dropped the Birth/Death Model charts from this report. For those who follow the numbers, I keep this caution: Do not subtract the reported Birth-Death number from the reported headline number. That approach is statistically invalid. Should anything interesting arise in the Birth/Death numbers, I will add the charts back.

Table 15 BLS Alternate Measures of Unemployment



click on chart for sharper image

Table A-15 is where one can find a better approximation of what the unemployment rate really is.

Notice I said "better" approximation not to be confused with "good" approximation.

The official unemployment rate is 5.9%. However, if you start counting all the people who want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc., you get a closer picture of what the unemployment rate is. That number is in the last row labeled U-6.

U-6 is much higher at 11.8.0%. Both numbers would be way higher still, were it not for millions dropping out of the labor force over the past few years.

Labor Force Factors

1. Discouraged workers stop looking for jobs
2. People retire because they cannot find jobs
3. People go back to school hoping it will improve their chances of getting a job
4. People stay in school longer because they cannot find a job
5. Disability and disability fraud

Were it not for people dropping out of the labor force over the past several years, the unemployment rate would be well over 9%. Some of those dropping out genuinely retired. However, millions retired involuntarily. That is, they needed to retire and collect social security because they had no job and no income. Such folks are no longer in the labor force even if they want a job. The falling unemployment rate is very deceiving, painting a picture of improvement that simply does not exist.

A gallup survey on the economy better reflects how the average Joe feels: 38% Think Economy Getting Better, 56% Say Worse.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Bernanke Turned Down For Mortgage Refinance; Questions Abound

In the curious news of the day, former Fed Chair Ben Bernanke was turned down in his effort to refinance his mortgage.

Bloomberg reports You Know It’s a Tough Market When Ben Bernanke Can’t Refinance.

Ben S. Bernanke said the mortgage market is still so tight that he’s having a hard time refinancing his own home loan.

The former Federal Reserve chairman, speaking at a conference in Chicago, told moderator Mark Zandi of Moody’s Analytics Inc. -- “just between the two of us” -- that “I recently tried to refinance my mortgage and I was unsuccessful in doing so.”

“The housing area is one area where regulation has not yet got it right,” Bernanke said. “I think the tightness of mortgage credit, lending is still probably excessive.” 

Questions Abound

1. Given that Bernanke makes $250,000 per speech, why does he even have a mortgage? 
2. How big is it?
3. What about Bernanke's finances? Is Bernanke living beyond his means?
4. Is there any chance Bernanke was turned down on purpose as a publicity stunt to highlight a fictitious need for looser mortgage standards?

I cannot quite put my finger on it, but “just between the two of us”, something about this story does not seem exactly as presented.

Perhaps I am wrong and Bernanke just firmly believes the dollar is trash and the Fed will inflate his mortgage away.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com 

Mainlanders Protest Hong Kong Shopping Disruption

Shopping! We're always happy when we shop until we drop.

There's interesting side commentary on the ongoing Hong Kong protests that focuses on the responses of visiting mainlanders to ongoing events there. Instead of having a nice, restful holiday during Golden Week in Hong Kong as they planned a few weeks ago, they are instead confronted by the sight of protesting bourgeoisie. Aside from the lack of a hard crackdown apart from the first few hours when students were tear-gassed, other commentary concerns how well-behaved the mainlanders have found the protesters. As it turns out, they are following a script on civil disobedience that does not give the authorities grounds to crack down hard.

Being a rather shallow, sort, however, I was more intrigued by the annoyance caused to the mainlanders on shopping trips to Hong Kong. While Hong Kong shops aren't exactly cheap due to the rents they have to pay, taxes are generally lower than on the mainland, making HK shopping a relative "bargain." Meanwhile, those damn protesters prevent you from going from Tsim Sha Tsui to Central easily as they clog the road and slow down public transportation. How dare them!

Chinese tourists pouring into Hong Kong this week for a shopping holiday are getting an unexpected lesson in democracy from the city’s tens of thousands of protesters demanding free elections. So far, most of them are unimpressed. “We’re just here to go shopping,” says a young woman from Guangzhou, standing with a friend outside of a jewelry store on a shopping street in Mongkok, Kowloon that has been turned into one of several protest sites for demonstrators of Hong Kong’s so-called “Umbrella Revolution.”

We then get to the commerce-killing qualities of the protesters:

The arrival of thousands of Chinese tourists for the country’s annual one-week holiday at the beginning of October—known as Golden Week for the amount of shopping and leisure travel that takes place—is one opportunity to start that process. One woman handing out leaflets on Canton Road in another Kowloon neighborhood, Tsim Sha Tsui, where protesters have blocked traffic in between stores like Coach, Fendi, Dolce & Gabanna, Prada said mainland shoppers had only come up to ask for a bottle of water or some of the snacks on reserve for the protesters. They didn’t inquire about the demonstrations...

But Chinese tourists in Hong Kong today seemed not only surprised to see their favorite shopping districts overtaken by activists, but also annoyed, and critical of the demonstrators. Shoppers hustled by a group of students, young professionals, and older local residents sitting along Canton Road, listening to speeches and folding yellow ribbons, a symbol of the protest. “Too much democracy can get chaotic,” said a man from China’s northern Shandong province, who would only name his surname, Ma, as he and his family observed the group.

Meanwhile, global equity markets are getting all shook up by the events in Hong Kong. Why don't we hear about the rights of international shoppers to buy luxury goods during regular store hours? Certainly it's a human rights violation at least on par with what these busybodies are complaining about. While the protests are not finished yet, businesses expect these disruptions to have taken their toll in what would otherwise would have been a season of selling:

Louis Chan, chief executive of the residential division at Centaline Property Agency Ltd., one of Hong Kong's biggest real-estate companies, said he expects the protests to put potential buyers off viewing new properties. He said the number of property viewings on Hong Kong island fell 50% over the past weekend, when protesters blocked the streets. "I think the overall property sales will drop by 30% this week compared with early September if the street protest continues," Mr. Chan said. Sammy Po, chief executive of Midland Realty's residential department, said number of property viewings in its Wan Chai and Causeway Bay branches fell 50% in the past two days, compared with a week earlier

And, of course, there's retail:

“It’s still too early to gauge how much business we lose during the Golden Week,” Chow Sang Sang sales operations director Dennis Lau said in an interview. “It may be a headache for some shoppers trying to go to districts such as Mong Kok and Causeway Bay as buses and taxis aren’t running.” The economic loss for shopping malls and office buildings is at least HK$40 billion ($5.2 billion), China Central Television reported yesterday, citing business associations. The protests aim to paralyze transportation, harm the rule of law and disrupt business to pressure the government into accepting “various unreasonable demands,” CCTV reported.

Besides...

...the Man's too big...the Man's too strong