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What We Read Today 31 January 2014

Econintersect: Every day our editors collect the most interesting things they find from around the internet and present a summary "reading list" which will include very brief summaries of why each item has gotten our attention. Suggestions from readers for "reading list" items are gratefully reviewed, although sometimes space limits the number accepted.

Today we on the U.S. and global employment and wage issues, plus credit and the economy in China and a deflation warning.

Speaking Wednesday [29 January 2014] at ETF.com's InsideETFs conference in Hollywood, Fla., the head of Roubini Global Economics and NYU business professor said 2014 was likely to be a good year for stocks and not a disastrous year for bonds, as many fear.

  • When Will Beijing's Trust Bailouts End? (Anne Stevenson-Yang, The Wall Street Journal) So far every time a Chinese trust starts to fail, it is rescued at government behest. Stevenson-Yang says that China is simply shoring up moral hazard and supporting bad debt to mainatin the appearance of high growth. See also GEI Analysis for a detailed explanation of the problem by Michale Pettis.

The next seven articles are about employment and wages followed by two articles on the true condition of the Chinese economy and credit markets and concluding with the most ominous deflation/recession warning we have read in years.

  • The Myth of Industrial Rebound (Steven Rattner, The New York Times) Hat tip to John O'Donnell. Great data and discussion. This article clearly lays out the competition in global labor markets.

  • A crazy explanation for what is happening to workers (R.A., The Economist) Employment changes are tied to productivity changes in this discussion. When productivity rises above trend so will employment; below trend and employment increases lag. Until the mid-1980s productivity was pro-cyclical (falling in recessions, rising in recoveries). Since then productivity has been counter-cyclical and "jobless recoveries" from recessions have resulted. There is a lot more detail in the article but the above gives a simple summary.

jobs-automation-Frey-Osborne-oxford-u-2013-sep-17

  • What "wages explosion"? (Leith van Onselen, Macro Business) With the Australian Wage Price Index declining, is there a problem? van Onselen says there might be with because of a declining Australian dollar:
"... it is important that any further devaluation of the Australian dollar is not offset by rising wage claims, otherwise Australia's non-mining economy will remain uncompetitive, leading to widespread job losses as the mining investment boom unwinds."

australia-wage-index

... the strong real income gains experienced over the past decade were an aberration, juiced by the once-in-a-century surge in Australia's terms-of-trade. Income growth going forward will be anemic, which is required to restore Australian competitiveness. Otherwise, Australia faces the prospect of more industry closures and rising unemployment.

australia-real-household-disposable-income

"The longer interest rate liberalization is put off, the harder it will to manage a successful move to a more price-oriented financial market."

china-gdp-growth-chinn-2013

  • World risks deflationary shock as BRICS puncture credit bubbles (Ambrose Evans-Pritchard, The Telegraph) The BRICS economies could see a breakdown into recession as the Fed taper removes liquidity upon which they have been depending. This would be just the shock that Christine Lagarde warned about last week in Davos:
"The deflation risk is what would occur if there was a shock to those economies now at low inflation rates, way below target. I don't think anyone can dispute that in the eurozone, inflation is way below target."

Credit inflows are drying up; outflows could spring the deflationary trap.

developing-countries-private-capital-flows

Evans-Pritchard describes China as having a credit bubble problem comparable to the U.S. in 1928, Japan in 1990 and the UK in 2007. This situation is exacerbated, he says, by production costs in China that are now 10% higher for Airbus than in France.

And how is Europe doing?

"Europe has let its defences collapse behind a Maginot Line of orthodox monetary policy. Eurostat data show that Italy, Spain, Holland, Portugal, Greece, Estonia, Slovenia, Slovakia, Latvia, as well as euro-pegged Denmark, Hungary, Bulgaria and Lithuania have all been in outright deflation since May, once tax rises are stripped out. Underlying prices have been dropping in Poland and the Czech Republic since July, and France since August."

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