Mirabile Dictu! The Media Notices the Sucking Sound of Growth (What Little There Was) Leaving the Economy and Underplays IMF Malpractice

Starting late last week, there’s been a marked shift in the mix of headlines in the major media outlets. While it may simply be post fall equinox moodiness or a confluence of downer reports leading to a rare moment of sobriety, suddenly the big venues are concerned about the economic outlook. It’s not like 2007, when a lot of people knew the good times were going to come to a nasty end, but the big money felt it had to stay in to the last possible moment, since getting out early might prove to be too early. This time, while comparatively few expect anything much better than a weak recovery that will hopefully gain strength, the quiet consensus was that any downside (at least in the US) was capped by housing “recovery,” less awful employment data, and above all, the Fed.

Against that, even before the latest reports, you could pit the continuing slow motion train wreck in Europe, not so hot reports out of China, and our coming fiscal cliff, where even if the pols win (as in force their toxic Grand Bargain on the rest of us), we lose. Deficit cuts, even if they are attenuated and back loaded, will still be a dampener. And even though the ESM officially came into being today, the surplus countries still retrading elements of various agreements, raising the market-rattling possibility that the various bailout schemes could come unglued. Of course, as we’ve pointed out, with the best case scenario being grinding periphery Europe into penury and taking down the core, staving off a crisis does not mean the alternative is cause for great cheer.

One simmering background issue has moved to the fore: most US public companies have had very little in the way of revenue growth since the crisis. Their record earnings have been the result of aggressive cost cutting. And this isn’t a crisis related development. Andrew Haldane did an analysis that confirmed that, indeed, there is evidence that investors are unduly short-term oriented; they require unduly high returns, which leads to underinvestment, particularly in ventures with back-loaded payouts, like infrastructure. Even the limited literature indicated this bias had had considerable influence on corporate decision-making. As Haldane noted:

Short-termist behaviour among investors appears to have rubbed-off on companies. Poterba and Summers (1995) surveyed Chief Executive Officers (CEOs) at Fortune-1000 firms. They found that the discount rates applied to future cash-flows were around 12%, much higher than either equity holders’ average rate of return or the return on debt. This excessive discounting implied that some firms were rejecting positive net present value (NPV) projects…

Graham, Harvey and Rajgopal (2005) surveyed 401 executives. They found three striking results. First, managers would reject a positive-NPV project if that lowered earnings below quarterly consensus expectations. Second, over 75% of the sample would give up economic value in order to smooth earnings. Third, managers said that this was driven by the desire to satisfy investors…

Most recently, in 2011 PriceWaterhouseCoopers conducted a survey of FTSE-100 and 250 executives, the majority of which chose a low return option sooner (£250,000 tomorrow) rather than a high return later (£450,000 in 3 years). This suggested annual discount rates of over 20%.

Read that again. 20% implicit required returns in a ZIRP environment. The only way you can make that sort of money in most large companies consistently is by looting or other forms of abuse of the public. But since a lot of customers are less well off than they used to be, even that strategy isn’t as easy to execute as it once was. So the next best thing is the other low risk way of improving earnings, which is cost cutting, meaning headcount cutting. One hedgie reader has been telling us of the poor quality of earnings and how little the media has taken notice of how frequently earnings guidance being revised downwards over 2012. Reuters reported last Friday that the S&P earnings are anticipated to have fallen last quarter:

Third-quarter earnings for companies in the S.& P. 500 are forecast to have fallen 2.4 percent from the year-ago period, which would be the first decline in three years, according to Thomson Reuters data.

Bloomberg weighted in on Monday on the gloomy outlook for earnings season :

Third-quarter profits and sales for the Standard & Poor’s 500 Index (SPX) probably fell in unison for the first time in three years, according to analysts’ estimates compiled by Bloomberg. Per-share earnings may have dropped 1.7 percent on average after they were little changed in the second quarter. Sales may have slipped 0.6 percent, the data show.

While most companies plan to keep a lid on spending, lower expenses aren’t leading to the same kinds of increases they reported earlier this year. Hewlett-Packard Co., the world’s largest personal-computer maker, already forecast full-year profit that trailed analysts’ estimates, FedEx Corp. (FDX) cut its annual earnings forecast and Intel Corp. (INTC) projected lower third- quarter sales, with all three citing softening demand.

“A lot of the earnings growth that we’ve seen has been related to cost reductions,” said Peter Jankovskis, co-chief investment officer for Oakbrook Investments in Lisle, Illinois, which manages more than $3 billion. “Now many of those cost reduction efforts have run their course. Without revenue growth, there is no room for profit to expand further.”….

The earnings season “may be rather ugly,” based on early reports so far, according to Gina Martin Adams, a New York-based strategist at Wells Fargo & Co.

“While recession in the U.S. is not necessarily imminent, earnings are weakening fairly quickly,” Adams wrote today in a note. For the fourth quarter, companies may struggle to match analysts’ estimates as data indicates U.S. growth is stabilizing at a “depressed” pace, she said.

The U.S. economic slowdown, coupled with a worsening environment abroad, is leading more companies to consider further job and spending cuts. A Business Roundtable survey last month showed 34 percent of U.S. chief executive officers anticipate they will have fewer domestic employees in the next six months. That’s up from 20 percent when the survey was conducted last quarter.

As we’ve pointed out, the US and European economies are more integrated than most think. 25% of S&P earnings come from Europe. Now admittedly, small companies are the engine of job growth, but with the stock market being treated by the punditocracy as the barometer of the economic outlook, if a poor earnings season leads to stock price whackage, we might see the confidence fairy go into hiding.

And to add to the cheer, the IMF seems to have woken up to the fact that its policies are killing Europe the outlook for global growth isn’t so hot. From the Financial Times:

In its World Economic Outlook, the IMF downgraded its forecasts for global growth next year and provided ammunition to critics of austerity, concluding that governments had systematically underestimated the damage done to growth by tax rises and spending cuts.

The IMF now believes economic output will expand by 3.6 per cent in 2013, down from its July estimate of 3.9 per cent. But this assumes the US Congress will take action to avoid the “fiscal cliff” – the automatic expiry of tax cuts and introduction of spending reductions next year – and that eurozone governments will follow the European Central Bank’s plan to buy sovereign debt by committing to economic reform and closer integration.

“A key issue is whether the global economy is just hitting another bout of turbulence in what was always expected to be a slow and bumpy recovery or whether the current slowdown has a more lasting component,” the IMF said. “The answer depends on whether European and US policy makers can deal proactively with their major short-term economic challenges.”


1. The IMF does not believe in balance sheet recessions, where consumers and businesses prioritize debt reduction over taking advantage of profit opportunities. If they did, they wouldn’t be so cheery about possibly navigating “major short-term economic challenges.”

2. The IMF insists that the beatings in Europe will continue until morale improves.

The little bombshell in the IMF report is this bit, as recounted in the FT:

The IMF said that evidence from 28 countries shows that so-called fiscal multipliers, used by governments to assess the impact on growth of fiscal cutbacks, have underestimated the damage to the economy. “The multipliers used in generating growth forecasts have been systematically too low since the start of the great recession,” the IMF said. A smaller multiplier implies fiscal consolidation is less costly.

Olivier Blanchard, chief economist, indicated on Tuesday that the analysis had influenced the Fund’s policy prescriptions for countries under IMF programmes. Mr Blanchard cited the troika’s recent relaxation of Portugal’s deficit target for 2013 to 4.5 per cent of gross domestic product from 3 per cent, saying: “When the case is fair, we have to get ready to adjust targets given that fiscal multipliers are so large.”

According to the IMF, policy documents seen by fund officials suggest that governments are commonly using fiscal multipliers of about 0.5 to calculate the impact of austerity on growth. A multiplier of 0.5 would mean that for every $1 lost in government spending, 50 cents is wiped from output.

“Our results indicate that multipliers have actually been in the 0.9 to 1.7 range since the great recession,” the fund said.

Mr Blanchard said fiscal multipliers were substantially larger than usual because the impact of fiscal cutbacks could not be offset by looser monetary policy. “We are in a period where many countries are in a liquidity trap and monetary policy is much more constrained than in normal times,” he said.

In case you missed it, this is an admission of complete and utter incompetence.

The IMF was relying on assumptions by the folks forced to put together austerity budgets that austerity worked, specifically, that cutting government deficits by $1 would only reduce GDP by 50 cents.

In what will be no surprise to any reader of this blog, they’ve finally been forced to see that isn’t working, that cutting deficits are at best barely productive in lowering debt to GDP ratios ($1 of deficit reduction lowers GDP by 90 cents) to pretty counterproductive ($1 of deficit reduction leads GDP to fall by anywhere from 90 cents to $1.70).

I read the IMF report discussion of this issue. Tellingly, it does not show the actual GDP multipliers in the countries that have the Trokia’s boot on their neck; it instead has a crowded chart showing “fiscal consolidation plans and growth forecast errors” and has countries like the US, Canada, Australia, and Korea mixed in with the European problem children. Looks like a concerted effort is being made not to publish the fiscal multipliers of the countries where austerity is clearly backfiring, although it would probably not be hard for an economist with decent access to data to make a stab at it. Put more simply, simply publishing the dispersion (0.9 to 1.7) disguises the distribution. If most are over 1, as it would be reasonable to surmise, that would be cause for the IMF to demand major rethinking of the austerity hairshirt. Well, except that would require the IMF to have integrity and the will to defy German/surplus bloc country demands that those profligate GIPSIs pay.

You can almost read the sputtering between the lines of the bureaucrat-speak in the report: austerity works! Well, it usually works, per us! Well, there have to be special reasons why it looks not to be working now, like too many countries are trying it at once and loose monetary policy isn’t helping (translation: the IMF forgot no one can trash their currency in a currency union). Well, that means we just have to made a few changes, since clearly nothing is wrong with the basic idea.

Not that the IMF had much of a defense for its conduct before, but it is now undeniably engaging in economic malpractice.

And as for Mr. Market, even if reality has penetrated for a moment, most investors are still confident the Fed has their back, even if the central bank looks a wee bit less potent than it once did. We’ve have plenty of cases in the past, the dot com era being the most extreme, where stock market averages have defied sanity for protracted periods. Thus while there looks to be increasingly good reason to doubt that stretched valuations will hold, it is never over until the fat lady finally sings.

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  1. Ruben

    Austerity might work and the fiscal multipliers could be more benign IF the cuts were applied on the right parts of gov’t spending -such as those parts of the State infected by corruption, State companies, banking cartels, subsidies and luxuries to the predatory political class, defense- instead of on services to the private citizens and workers.

    Alternatively, a nice jolt to economic vitality could be given by legalizing all kinds of drugs, organ commerce, and other enterprises currently illegal (i.e. left to produce economic yield for the State security apparatus and for criminal cartels).

    I’m kidding of course, all I’m saying is very craaazy, I’ve been influenced by notorious NC commenter crazyman.

    1. skippy

      The wealth trust or *legacy bond holders* as I call them are your target.

      Skippy… Remember your history… Shooting, targeting officers was a hanging offence. The higher up, the greater the crime, and then you have the folks that never set foot near hazard, me wonders why? Stop focusing on the moving targets supplied, for you, by them. Big bad government shezzz.

  2. ZygmuntFraud

    So, the IMF is assuming the US Congress will be “anti-austerian” and let the tax cuts roll on?

    Also, I’m wondering if talk of the “fiscal cliff” is likely to continue for years. Yes, I’ve read the interesting ideas of MMT-theorists, but they seem so un-mainstream, un-Greenspanian, un-Bernankian: I’d bet the Wall Street Journal has barely (if ever) touched this …

    An anti-austerity stance means roughly a larger-deficit stance, given the limited options under consideration …

    The US Congressional Budget Office had projections back in August based on the path taken (austerian, anti-austerian):

    “An Update to the Budget and Economic Outlook: Fiscal Years 2012 to 2022”,


    1. Dan Kervick

      What is missing in these IMF-style analyses Yves describes is the dimension of deliberate political intention. It may well be that some of the government officials promoting austerity plans are simply incompetents who truly believe austerity will “work” to produce expansion by contraction. But that diagnosis misses the possibility that many of them are pushing austerity because they are deliberately attempting to weaken, subvert or overturn governments and put public sector enterprise out of business, and they simply don’t care if this causes a decade of pain.

      1. citalopram

        I keep asking myself who benefits from austerity? It’s clear from this article that a whole host of industries (retail) are suffering. So, who benefits? Bankers?

        1. ohmyheck

          Read Naomi Klein’s “The Shock Doctrine”. She goes into great detail about just Who benefits from all of this “austerity”.

  3. The Dork of Cork

    I don’t think the IMF are fools somehow.

    The truth is many of us are worth more dead then alive withen the Euro structure.

    Our role is to bail out the core by buying their products not to sustain domestic demand and rational domestic investment.
    Everybody knows Fiscal production gives you must more bangs for your buck as there is less waste inherent withen its production and flow.
    There is almost no bank credit production withen Ireland and what little I can see comes from the car giants.
    Therefore fiscal production is more or less the only money supply.

    The biggest selling car model this September was the diesel BMW 3. (130 units)
    BMW Ireland have been offering 37 month credit packages for both the BMW 1 & 3.
    I don’t think Iceland was buying too many BMWs back in 2009 or 2010 – everything went into sustaining domestic demand.

    Countries such as Ireland have always functioned as a conduit for the core.

    Irish Market share (Jan -Sep)
    BMW Y2012 : 4.27% Y2007 : 3.88%
    Audi Y2012 : 4.67% Y2007 : 2.89% (rich mens toys increase market share)

    Ford Y2012 : 10.8% Y2007 : 11.42 %
    Toyota Y2012 : 12.54% Y2007 : 15.22 % (everyman cars decrease ? )

    Volkswagen Y2012 : 12.66 % (number 1 brand 2012) Y2007 : 11.41%

    Y2007 (Jan -Sep) BMW sales Petrol :3,690 , Diesel : 3,320
    Y2012 (Jan – Sep) BMW sales Petrol : 38 ,Diesel : 3,236

      1. The Dork of Cork

        I like this bit
        References in this article and headline to the ‘bog of Ireland’ were changed to ‘bog of Allen’ on 9 October

        I hold no hatred for the Brits really – they are almost much a victim of the city as us bogmen post 1600s….they get the scraps from the table much as we get the scraps from the Pharma and multinational sector….thinking that they do well from the arrangement but in the long run they don’t.
        They die in the trenches or something.

        The funny thing about the above is that it is not likely to work very well – the energy density is simply not there.

        The most recent UK energy balance shows coal taking up much of the slack from Nat gas power station shutdowns.

        Wind did ok this past year because of the active north atlantic jetstream but did not do much when we really needed it during the cold anti cyclonic winters of 2009 & 2010.

        The banks need to be shown the door – they have no purpose other then extraction….
        We have to come to the conclusion that the democracy thing post cromwell was / is a illusion.

        I would have no problems joining in a union with the UK if these isles had a Fiat king and not a Bitch Queen of the Habsburgs
        But its not likely to happen this side of the dark ages is it ?

        1. M Quinlan

          The Wife and Kids are English so I’m not a knee jerk Brit basher either.
          Still whether wind farming is feasible or not it’s the neocolonial presumption which irritated me, one that seems to be shared by Paris and Berlin now as well.
          As for the City, every nation’s a victim of that malign cesspit and its BOE enablers. More Brits are finally beginning to see that now the chickens are coming home to roost. Probably won’t make a blind bit of difference though.

  4. Max424

    Superb, Yves. Truly.

    I would only add that my New Year’s prediction, that the Dow would this year break its best previous score(14,093), suddenly ain’t looking too good.

    I thought Round 3 of QE would do the trick, but since the announcement, the Dow has been doing the old up and down bounce in a pretty narrow trough.

    Could it be that the Fed’s juju is being counteracted by the fundamentals, and the result is a stalemate?

    The fundamentals! The world economy is in deep recession/depression, and the Dow can’t quite make that last, itty bitty move, and blast past its all-time high.

    Bravo Mr. Market!

  5. AussieF

    It’s like hearing a group of 13th century theologians discussing the Second Coming, just replace the Messiah with the mythical arrival of sustained growth in the Eurozone.
    And speaking of articles of faith – by definition it’s a doctrinal impossibility for anyone in the IMF to accept that slashing wages, destroying social rights and plundering the treasury for the banks doesn’t lead straight to a secular nirvana. Clearly, if the plan’s not working there’s only one solution: slash wages some more, privitize everything, blame the unions, and throw more money at the banks. Amen

  6. Watt4Bob

    “Short-termist behaviour among investors appears to have rubbed-off on companies.”

    This jumped out at me, as I have been observing that ‘everybody is doing the same thing’ and that same thing is paying their workers nothing and all the while a frantic sort of cheer-leading mixed with castigation as if the low-level employees were responsible for the low revenue that is driving management nuts.

    It’s a vicious negative-feedback loop that leaves businesses looking ragged and desperate.

    I’m hoping at some point it’s going to sink in to the 5%’s brains that they ended up in this predicament by following the psychopathic 1%.

    1. Bostonite

      “I’m hoping at some point it’s going to sink in to the 5%’s brains that they ended up in this predicament by following the psychopathic 1%.”

      Best line of the day, Watt4Bob.

    1. ohmyheck

      Howabout they slash all the CEO bonuses? That’ll “cut costs”. Kind of a no-brainer, but then we are talking about Brainless Incompetent Psychopaths, so….

      1. Clive

        I agree 100% but this is McKinsey we’re talking about here so alas that suggestion falls into the “turkeys voting for Thanksgiving” category (sorry Yves).

  7. The Dork of Cork

    There is the more radical solution of dumping both fiscal & consumer credit and just getting the goverments to produce the money….but I guess we can’t have that silly.

    The simple truth is that there is no real need for credit banks in a energy starved world.
    They only appear to work when they can drag more energy from the future into today and express a profit on the waste production.

  8. Tom

    Legal Gambling
    The gloom is fading from the real estate situation. More nibbles during the last few weeks than the last three years. If January brings us good rains, this next year will open the door to the sunshine – a case of rain bringing the sun.
    It is to be hoped, however, that there will never be another boom. The crash of the boom of 1923 was due to the same causes that wrecked the wall street stock market. People sold what they did not own. They made a payment down in the hope of getting the property off their hands before it began to burn. Real estate fell into the hands of sharp-shooting gamblers who had no interest in land. To them it was just a pile of blue chips on a roulette wheel.

    Same roots different century – when will we learn the lessons that history has taught us – over and over again. I suppose Einstein had something to say about this.

  9. The Dork of Cork

    The purpose of the PIiGS is to buy time for the Core……..so that they can restructure their economies.

    The longer we stay withen the Euro the longer the extraction process….the more time the core has to rejig its systems.


    Notice the “Spanish” CAF trams are being assembled north of the Pyrennes.

    The core countries can continue to manipulate local elites such as the Irish large farmers which have grown fat and dependent on the now almost dry Euro Tit and are willing to do anything and everything to sustain this bounty at the expense of the nation. (this was the first Euro victory of the 1970s…..feed the powerful east coast farmers and dump the weak small farmers and fishermen)

    Meanwhile the Germans can sell more BMW 3Ds in Ireland (770 units this year)
    BMW 316d
    * Price: From £27,255 (as tested) (UK price)
    * Engine: 2.0-litre 4cyl turbodiesel
    * Transmission: Eight-speed automatic, rear-wheel drive
    * Power/torque: 114bhp/260Nm
    * 0-62mph: 11.2 seconds
    * Top speed: 126mph
    * Economy: 64.2mpg
    * CO2: 117g/km

    rather then Volkswagen UPS (248)
    Price: £10,390 (UK price)
    * Engine: 1.0-litre 3cyl, 74bhp
    * Transmission: Five-speed manual, front-wheel drive
    * 0-62mph: 13.2 seconds
    * Top speed: 106mph
    * Fuel economy: 60.1mpg
    * CO2: 108g/km

    for 3 ~ times the cost (they both have similar fuel consumption figures) which means more fuel is available for them to waste or invest at home in Germany.
    The PIigs are both borderline retarded and corrupt.

    With the local elite running away from national sov policies at the max speed possible as it does not conform to their short term Euro bank / wage interest.

    Its beyond sick – this EU frankestein experiment.
    It has destroyed both Spain and Ireland , the landscape of these countries and its people.

  10. Lafayette

    {Not that the IMF had much of a defense for its conduct before, but it is now undeniably engaging in economic malpractice.}

    I suggest you ask the Greeks if they feel that way.

    The IMF has been buying huge quantities of Greek Euro debt.

    Let’s not go overboard … there’s more than one culprit than the IMF for the world’s debt-management malfeasance. It was a highly communal undertaking and the first off the mark was Wall Street.

  11. Dikaios Logos

    I have a slightly different take on the short-termism of investors rubbing off on companies. As someone who has been in and out of employment over the past few years and knows many other similar cases, I have noticed a huge number of deeply mediocre and deeply entrenched workers and executives keeping their positions since 2008. Basically these people had a symbiotic (or more likely Master-Serf) relationship with financiers and their financializing-of-the-economy dynamic of the past few decades. While almost all of these mediocre and entrenched types didn’t get rich, they often enjoyed a meaningful (I’d guess at least 10%+) increase in their earnings and a much lower risk of unemployment in return for their fealty to the financiers.

    The low risk business strategies, including the ridiculous problems in hiring that NC has pointed out such as painfully narrow job descriptions, appear to me a sign that these folks, like their banker patrons, have painted themselves into a corner. The current culture at many companies strikes me as simply unsustainable, even in the medium-term. To take almost any meaningful risk means ending the chokehold of these mediocre mafias. And once that chokehold ends, a lot of people who are relatively less productive are going to see their position decline.

    Who are these people? I think a few dynamics are work. For one, the naturally submissive are one obvious group. Related to being submissive, many of these people desperately unimaginative, they think of conforming as a means to productivity, not in terms of innovation or even correcting error. But perhaps more importantly many of these people are of a simpler time demographically. Many under-performing white males and quite a few white females band together in these organizations and work, in effect, to preserve (conserve?) as much of the antediluvian demographic as possible where “good jobs” are held by whites, as they can’t imagine that isn’t their natural place.

    This class of entrenched workers and execs often parrot the Tea Party’s paranoia and the canards about “uncertainty” harming the economy and Obama being “anti-business”. This is likely a realization among these folks that they are likely to end up in a lower part of the pecking order very soon. This means both that our problems are much larger than the bankers, but also that the dynamic that allowed the bankers to loot is much more fragile than some commenters here imagine.

    1. Clive

      Well, speaking as one of the above mentioned archetypes (no joke, I’m *not* taking the mickey, that’s what I consider myself to be) I can offer a hopefully useful insight.

      I continue in that mode of operation because — let me count the reasons:

      1) That is what I’m currently being paid to do and if they keep on paying, I’ll keep right on doing
      2) Self-induced pangs of conscience not withstanding, I’d earn a lot less elsewhere for the privilege of being able to exercise my imaginative side
      3) Yes, it is somewhat degrading but so is the unemployment line
      4) I’m well aware that it can’t go on as it is but, as is so often observed, just because something can’t go on doesn’t mean its demise is imminent; rubbish management — especially in zombie corporations — can persist and, as you say, even thrive a lot longer than anyone can expect on occasions
      5) What, exactly, is wrong with grabbing as much as I can before the roof falls in ? If there’s a better option I’m not seeing, am happy to take suggestions…

      Yes, I know that kind-a makes me part of the problem etc. but I do in my own small way try to nudge the ship towards a better course when I can. It would help my motivation if the ship weren’t the Titanic though…

      Kind regards

      Clive (who is trying not to appear too troll-like and is really hoping to make a serious point here)

      1. Dikaios Logos

        By virtue of being here and commenting, I’d surmise your a bit less of a problem than you cast yourself as being. But anyway…

        For one, I wouldn’t necessarily say you shouldn’t behave in such a manner vis-a-vis your job. But I would say you should be aware of the risks (this is a finance blog) of that dynamic:
        -it means a massive misalocation of capital and income, hindering long-term growth
        -it risks serious social breakdown, which makes that extra bit of income a lot harder to enjoy, unless you are mega-rich and can keep your distance from the riff-raff, third-world style
        -the longer-lived and more damaging that dynamic is allowed to become, the more serious the reversal is likely to be.

        While I think a certain amount of keeping your head down makes sense at the job, I think you should be attuned to the political issues that perpetuate that dynamic. This is especially true since the short-termism points to these dynamics highlights their being very, very fragile.

        I’m fond of reminding people that before the Republicans were the party of the entrenched rich, Democrats and the Southern planters were the entrenched rich, with no group of Southern Planters richer than those in Mississippi. And thanks to the Republicans’ triumph in the Civil War, Mississippi is now widely considered to be the bottom of the pile, even by Alabamans and Arkansans. You don’t really want to risk that kind of fall, do you?

        I think a lot of entrenched people at companies probably should take advantage of their comfort and become more engaged in civil society and politics. While the coming adjustment is likely to harm entrenched folks’ RELATIVE position, the bulk is the adjustment should almost certainly be born by financiers and other wealthy types and many entrenched workbees and execs. might actually experience a better ABSOLUTE position economically. By being helpful to ending these nasty extractive dynamics, in whatever way you see fit, you might be harming a little bit of your income prospects relative to others, but you would be giving yourself and many others a much more stable and humane world. Since you can never know how bad it MIGHT get, I think that is a prudent course of action. And again, just by being here, I think you are farther from the serous problems than you might imagine.

    2. citalopram

      In my tenure as an IT worker, it seems to be that keeping your job depends almost entirely on fealty and as you said, subservience, and less to do with competence. In other words, kiss ass to keep your job and get a promotion. Make waves and you’re out of there.

  12. The Dork of Cork

    Could you cover the record Q2 British current account deficit in your reports…..

    The real goods deficit has been with the UK since the big bang but the income part on the rest of the world is now negative also.

    It is of very great significance in my book.
    especially the negative income of -5.2 Billion

    Transfers is also negative : £ -5.5 Billion

    The Uk has been talking about cutting the EU farming subsidy thingy (transfers) which will affect Ireland & France in a big way.

    Its real goods deficit is of course huge at -28.1 billion

    Both in real goods and income these are the largest deficits ever recorded

  13. arne

    The IMF staff did in fact do research on the impact of fiscal shocks and the size of multipliers.


    The staff found multipliers can be up to 2.6 during a crisis or a recession. I’ve seen study’s on vox.eu citing multipliers of about 4 for Greece.

    I’m a journalist and have tried today to come up with a coherent story on the IMF WEO. Even the IMF (after the OECD) now thinks surplus countries should stimulate domestic demand – specifically The Netherlands and Germany. But they can’t seem to breng themselves to come to the logical conclusion and admit massive fiscal stimulus (investment) in these countries is neccesary because private investment is thorougly lacking – even before 2008.

    These people are so committed to these stupid EMU-criteria on debt, they have been telling the public these rules for so long they can’t make a policy turn, just like Cameron and Osborne. But Cameron and Osborne can at least point to a current account deficit – but not the Dutch and Germans.

    I know the policy ideas of the Dutch central bank and the Dutch finance minister. Totally wedded to the treasury view. I comfort myself with the notion the Dutch central bank is always wrong on macro, just as they were during the Great Depression. Always wrong.

    1. Yves Smith Post author

      This is VERY helpful, thanks, and also show the staff research, which shows much bigger multipliers (contradicting the quarterly report mewling about how they didn’t expect this, surely just tweaking will work) is an abject misrepresentation of what they knew full well in house. Not that there’s reason to doubt that, but having a smoking gun is important.

    2. The Dork of Cork

      I don’t think massive deficit spending will work in the non national euro market state experiment both from a political deomocratic control and economic balance of trade perspective.

      Its best to break it up as fast as possible – at least from the PIigs perspective as we are transfering a huge amount of real resourses to the core for little gain – especially with regard to German worse then pointless mercantile policey.

      You see its the nature of the present and past investments which are the problem.
      The entire sick artiface needs to be broken up.
      At the very least we need to get back to nation states although I would prefer to see a pre 1648 Europe again with a more complete divorce of the banks from the state as they now have no real productive function now if ever.

  14. MrColdWaterOfRealityMan

    Does anyone else find it comical that the IMF report never mentions that oil prices have increased 10-fold in 15 years?

    Or is is just me?

  15. Hugh

    The troika is made up of the IMF, the ECB, and Germany/the core. It has been pushing austerity. Austerity is about gutting the public sector, dismantling the social safety net, and selling off the commons of peripheral countries. It is pure and simple a looting process. It was never meant to fix anything, and it hasn’t.

    Look at the US. We are 5 years out from the bursting of the housing bubble, 4 years out from the meltdown, and nothing has been fixed here either, just a steady stream in the trillions finding its way to the banks and through them to the rich. And of course austerity, It is already a fact at the state level. At the federal level, it is underway too with pay freezes and spending cuts but nothing like what is enviseaged after the election in the manufactured crisis of the fiscal cliff.

    Our elites and the elites in Europe know that austerity doesn’t work. The math never worked, reinforced now by 2-3 years of experience on the ground. The problem here as in Europe is too much wealth, and along with it power, has been concentrated into too few hands. The result is policies harming the 99% and the real economy, but not the rich and the political classes they own.

    1. Ms G

      “Our elites and the elites in Europe know that austerity doesn’t work. The math never worked, reinforced now by 2-3 years of experience on the ground. The problem here as in Europe is too much wealth, and along with it power, has been concentrated into too few hands. The result is policies harming the 99% and the real economy, but not the rich and the political classes they own.”

      Taking the above as a given, which I do, doesn’t it seem to suggest that austerity in fact “works” — just not for the reasons advertised to, and shoved down the gullets of, the 99%.

    2. Crazy Horse

      When the capitalist system reaches the end of growth— of resource exploitation, energy resources and debt slavery expansion then wealth accumulation becomes a zero sum game. What else can a poor Rothchild to do except extract wealth from the inferior classes until they are but dry husks blowing in the wind?

  16. Lune


    I disagree with blaming investors for corporate short-term thinking. First, 2/3rds of the S&P 500 is owned by institutional investors who have investment horizons and strategies measured in decades. These are not short-term daytraders. Second, “investors” have less say in deciding corporate strategy than voters in the USSR had in picking their leaders. While corporate execs like to talk about their dedication to “shareholder value”, their actual treatment of shareholders is marked by, at best, indifference, and at worst, open hostility.

    It isn’t investors who have short-term horizons. It’s corporate leaders whose pay is tied to short-term goals, and who understand that there’s no need to plan for longer than a few years because most likely, they’ll be somewhere else by then.

    1. Yves Smith Post author

      Please read Amar Bhide’s HBR paper, “Efficient Markets, Deficient Governance.” Investors don’t exercise any governance over public companies, ex when they buy a controlling stake or manage to get a seat on the board (say by having sold a big business to a bigger buyer and taking stock rather than cash as consideration).

      The average holding period for a publicly traded stock in the US is well under a year and it has been that way for well over a decade.

      1. Lune


        It sounds like you’re agreeing with my second point. Investors have very little say over corporate governance. Therefore, corporate execs blaming investors for their own short-term behavior is false. We have to look to other causes, the largest of which, I’d posit, is CEOs own pay structures that reward short-term stock price boosting over long-term corporate health.

        As for my first point, all the studies I’ve seen state that the *average* holding time for a share is under 1 year. That may be strictly true, but it’s distorted, because there’s a small portion of the S&P that gets churned every millisecond by HFT algorithms, while the vast majority is held long-term by institutional investors. When you average out the million circular HFT trades each lasting a microsecond, with the one institutional or index fund trade that lasts 10 years, the average gets brought down tremendously. But for most large corporations, at any given time, their actual investor base is much more stable than microseconds or even 1 year.

  17. The Dork of Cork

    In France there has been major investment programmes since 2009…..(especially in rail & tram systems)but much of it is not on the fiscal books.
    But in real terms it is bigger then their 1970s and 1980s Nuclear programme.

    Local authorties tax the local money supply for tram & local rail (TER) projects and stuff , the banks are involved via PPPs and the like. (the Bordeaux to Tours LGV alone is a gigantic 7.8 Billion euro programme)

    If France went back to the Franc it would simply not have access to the oil which is needed to build this big stuff.


    France is draining the capital (oil) from the PIigs so as to engage in these programmes.
    Germany continues to be happy doing its car stuff for the most part with some token fixed capital projects that could increase its internal productive capacity.
    But nowhere near enough.
    It want to keep its mercantile dreams.
    Giving credit in Ireland for BMWs and stuff.

  18. charles sereno

    I have a suggestion to provide feedback in order to improve this site. When I was in 1st grade (1937), my teacher marked our assignments (class of ~50 pupils) on a scale from 0 to 10. However, very occasionally he gave out a 10+1, 10+2, or (gasp) 10+3. I don’t like to take up space when I don’t have much to add, yet like many readers, I’m sure, I’d like to register my approval of a particular post. For example, right now I’d simply comment — 10+2. Of course, a system could be set up to rate individual posts. But other commenters would also like to see who’s rating what. There’s gotta be a better way and I’m hoping people come up with better suggestions. My feelings will not be hurt if I get no replies. My sense of discretion will just have improved.

  19. TK21

    I once read of a study that found the average corporation looks only 6 years ahead–and that was a while ago. Has anyone else seen or heard of this?

  20. Tim

    The simple reason for the change in headines is that the media wants to gaurantee a horse race between Obama and Romney since the debate, and it will get one if it paints a poor picture of the economy.

    I imagine it will spin the other way in early November to ensure Obama is still elected.

  21. ChrisPacific

    I wonder if, 500 years from now, neoclassical economics and austerity policies will be regarded in the same light as we view leeching and the divine right of kings today.

    One can only hope.

    1. Crazy Horse

      If the human species exists 500 years from now it will be in a form that has evolved to a state approaching wisdom and leaned to adapt to the disasters wrought upon the planet by our generations.

      Or more likely it will exist as wandering bands of hunter-gatherers grubbing for insects with sharpened sticks. And neoclassical economics won’t occupy a single line of code or a single cave painting in the historical record.

  22. tiebie66

    As far as I see it, the 1% has depleted the resources of the private sector. Now they wish to deplete the resources of the public sector: directly by reducing ‘entitlements’ or indirectly via deficit spending. The former being preferred. Can someone explain why deficit spending would not simply further enrich the wealthy (albeit in a roundabout way)?

    We need austerity for the extraction processes to collapse! Deficit spending right now simply serves to restore the status quo ante. Deficit spending *after* a reset makes more sense, indeed, will be necessary to fire the system up.

  23. bulfinch

    I’m glad for the bunny quotes around the word recovery WRT to housing. I am still not seeing how making SFH housig more expensive serves as any kind of boon to most middle class Americans (unless you’re a speculator or buy into wealth effect argument).

  24. Arne

    @ The Dork of Cork

    I’m all for a break up of the euro and a return to national currencies. This notion you have to be big to compete in a ‘global’ world is absurd. Just look at Switzerland, Sweden or Singapore. And the notion Europe needs the be unified to prevent wars is absurd as well.

    If a breakup happens I see the Dutch (I’m Dutch) sticking with the Germans. This would be a complete disaster since we would get an overvalued currency and no inflation to erode the large Dutch mortgage debt. Better let Germans take most of the hit when the inevitable happens when Spain, Greece etc leave.

  25. The Dork of Cork

    Yes but the Germans have played a good tactical game so far…..keeping the local elites of each country happy campers for just long enough – the problem is that their internal industrial strategy is a disaster (eg. mass solar stuff north of 50 degree lat is not too bright )

    They continue to be happy externalising the cost on their neighbours but eventually the ice will break.


    But its a sort of mad hatter chess game with different players on different levels …..former nation state systems & goverments are at the lowest level of this sick game.

    PS I like the Dutch – many Dutch (and even German) hobbits came over to rural Kerry in the 80s and added to the place.

  26. Josephus P. Franks

    Re: “Now admittedly, small companies are the engine of job growth,”

    One of the things that annoyed me about the presidential debate was the nonstop fellating of “small business”. Turns out that only 15% of net new jobs created were by firms with fewer than 20 employees; and over 60% were created by firms with over 100 employees, the largest share of which were created by firms with over 500.


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