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Archive for December, 2007

2007-12-31 US Economic Releases

Posted by WARREN MOSLER on 31st December 2007

2007-12-31 Existing Home Sales

Existing Home Sales (Nov)

Survey 4.97M
Actual 5.00M
Prior 4.97M
Revised 4.98K

2007-12-31 Existing Home Sales MoM

Existing Home Sales MoM (Nov)

Survey 0.0%
Actual 0.4%
Prior -1.2%
Revised -1.0%

Could be bottoming. Affordability is up nicely, employment is reasonably strong, income holding up nicely. And on a per capita basis, housing is at forty year lows.

2007-12-31 NAPM-Milwaukee

NAPM-Milwaukee (Dec)

Survey n/a
Actual 62.0
Prior 60.0
Revised n/a

2007-12-31 NAPM-Milwaukee TABLE

NAPM-Milwaukee TABLE

Table looks solid, and prices are still up quite a bit.


Posted in Daily | No Comments »

China – Passing higher food prices to Asia

Posted by WARREN MOSLER on 31st December 2007

It makes political sense to use export taxes as a form of a domestic subsidy for basic necessities, and from a macro economic
point of view, it a good way to express the political desire as well.

A negative is this will give domestic producers an incentive to ‘cheat’ to avoid the tax. Enforcement costs depend on they type of borders, etc.

It also puts downward pressure on the currency, though very modestly in this case, as it now takes more fx to buy the same products.

China – Passing higher food prices to Asia

Barclays Capital Research
by Wai Ho Leong

Tax on food grain exports comes shortly after subsidies removed.

In a further attempt to rein in food price inflation, China will introduce a one-year tax on grain exports beginning in January 2008. This will require exporters of 57 types of food grains to pay temporary taxes of 5-25%. Exporters of wheat, rye, barley and oats will be required to pay a 20% tax, while exporters of corn, rice and soy beans will have to pay 5%. Soaring food prices (+18% Y/Y in November), which have a 33% weight in the CPI, drove inflation to an 11-year high of 6.9% in November. The tax applies only to basic food grains. Other agricultural and processed products are not included, reflecting the government’s continued emphasis on promoting higher-value-added agricultural exports.

This latest administrative measure comes less than two weeks after China scrapped a 13% rebate on 84 types of exported food grains on 18 December. Prices have been rising, even though government reserves of corn and wheat were opened up earlier this year to meet domestic demand. The administrative measures taken in China will compound these pressures further, particularly in North Asian countries.


Posted in Articles, Currencies | No Comments »

A Rescue Plan for the Dollar

Posted by WARREN MOSLER on 31st December 2007

A Rescue Plan for the Dollar

By Ronald McKinnon and Steve H. Hanke
The Wall Street Journal, December 27, 2007

Central banks ended the year with a spectacular injection of liquidity to lubricate the economy. On Dec. 18, the European Central Bank alone pumped $502 billion — 130% of Switzerland’s annual GDP — into the credit markets.

Misleading. It’s about price, not quantity. For all practical purposes, no net euros are involved.

I have yet to read anything by anyone in the financial press that shows a working knowledge of monetary operations and reserve accounting.

The central bankers also signaled that they will continue pumping “as long as necessary.” This delivered plenty of seasonal cheer to bankers who will be able to sweep dud loans and related impaired assets under the rug — temporarily.

Nor does this sweep anything under any rug. Banks continue to own the same assets and have the same risks of default on their loans. And, as always, the central bank, as monopoly supplier of net reserves, sets the cost of funds for the banking system.

The causation is ‘loans create deposits’, and lending is not reserve constrained. The CB sets the interest rate – the price of funding – but quantity of loans advanced grows endogenously as a function of demand at the given interest rate by credit worthy borrowers.

But the injection of all this liquidity coincided with a spat of troubling inflation news.

At least he didn’t say ’caused’.

On a year-over-year basis, the consumer-price and producer-price indexes for November jumped to 4.3% and 7.2%, respectively. Even the Federal Reserve’s favorite backward-looking inflation gauge — the so-called core price index for personal consumption expenditures — has increased by 2.2% over the year, piercing the Fed’s 2% inflation ceiling.


Contrary to what the inflation doves have been telling us, inflation and inflation expectations are not well contained. The dollar’s sinking exchange value signaled long ago that monetary policy was too loose, and that inflation would eventually rear its ugly head.

The fed either does not agree or does not care. Hard to say which.

This, of course, hasn’t bothered the mercantilists in Washington, who have rejoiced as the dollar has shed almost 30% of its value against the euro over the past five years. For them, a maxi-revaluation of the Chinese renminbi against the dollar, and an unpegging of other currencies linked to the dollar, would be the ultimate prize.

Mercantilism is a fixed fx policy/notion, designed to build fx reserves. Under the gold standard it was a policy designed to accumulate gold, for example. With the current floating fx policy, it is inapplicable.

As the mercantilists see it, a decimated dollar would work wonders for the U.S. trade deficit. This is bad economics and even worse politics. In open economies, ongoing trade imbalances are all about net saving propensities,


not changes in exchange rates. Large trade deficits have been around since the 1980s without being discernibly affected by fluctuations in the dollar’s exchange rate.

So what should be done? It’s time for the Bush administration to put some teeth in its “strong” dollar rhetoric by encouraging a coordinated, joint intervention by leading central banks to strengthen and put a floor under the U.S. dollar — as they have in the past during occasional bouts of undue dollar weakness. A stronger, more stable dollar will ensure that it retains its pre-eminent position as the world’s reserve, intervention and invoicing currency.

Why do we care about that?

It will also provide an anchor for inflation expectations, something the Fed is anxiously searching for.

Ah yes, the all important inflation expectations.

Mainstream models are relative value stories. The ‘price’ is only a numeraire; so, there is nothing to explain why any one particular ‘price level’ comes from or goes to, apart from expectations theory.

They don’t recognize the currency itself is a public monopoly and that ultimately the price level is a function of prices paid by the government when it spends. (See ‘Soft Currency Economics‘)

The current weakness in the dollar is cyclical. The housing downturn prompted the Fed to cut interest rates on dollar assets by a full percentage point since August — perhaps too much. Normally, the dollar would recover when growth picks up again and monetary policy tightens. But foreign-exchange markets — like those for common stocks and house prices — can suffer from irrational exuberance and bandwagon effects that lead to overshooting. This is precisely why the dollar has been under siege.

Seems to me it is portfolio shifts away from the $US. While these are limited, today’s portfolios are larger than ever and can take quite a while to run their course.

If the U.S. government truly believes that a strong stable dollar is sustainable in the long run, it should intervene in the near term to strengthen the dollar.

Borrow euros and spend them on $US??? Not my first choice!

But there’s a catch. Under the normal operation of the world dollar standard which has prevailed since 1945, the U.S. government maintains open capital markets and generally remains passive in foreign-exchange markets, while other governments intervene more or less often to influence their exchange rates.

True, though I would not call that a ‘catch’.

Today, outside of a few countries in Eastern Europe linked to the euro, countries in Asia, Latin America, and much of Africa and the Middle East use the dollar as their common intervention or “key” currency. Thus they avoid targeting their exchange rates at cross purposes and minimize political acrimony. For example, if the Korean central bank dampened its currency’s appreciation by buying yen and selling won, the higher yen would greatly upset the Japanese who are already on the cusp of deflation — and they would be even more upset if China also intervened in yen.


Instead, the dollar should be kept as the common intervention currency by other countries, and it would be unwise and perhaps futile for the U.S. to intervene unilaterally against one or more foreign currencies to support the dollar. This would run counter to the accepted modus operandi of the post-World War II dollar standard, a standard that has been a great boon to the U.S. and world economies.

‘Should’??? I like my reason better – borrow fx to sell more often than not sets you up for a serious blow up down the road.

The timing for joint intervention couldn’t be better. America’s most important trading partners have expressed angst over the dollar’s decline. The president of the European Central Bank (ECB), Jean Claude Trichet, has expressed concern about the “brutal” movements in the dollar-euro exchange rate.

Yes, but the ECB is categorically against buying $US, as building $US reserves would be taken as the $US ‘backing’ the euro. This is ideologically unacceptable. The euro is conceived to be a ‘stand alone’ currency to ultimately serve as the world’s currency, not the other way around.

Japan’s new Prime Minister, Yasuo Fukuda, has worried in public about the rising yen pushing Japan back into deflation.

Yes, but it is still relatively weak and in the middle of its multi-year range verses the $US.

The surge in the Canadian “petro dollar” is upsetting manufacturers in Ontario and Quebec. OPEC is studying the possibility of invoicing oil in something other than the dollar.

In a market economy, the currency you ‘invoice’ in is of no consequence. What counts are portfolio choices.

And China’s premier, Wen Jiabao, recently complained that the falling dollar was inflicting big losses on the massive credits China has extended to the U.S.

Propaganda. Its inflation that evidences real losses.

If the ECB, the Bank of Japan, the Bank of Canada, the Bank of England and so on, were to take the initiative, the U.S. would be wise to cooperate. Joint intervention on this scale would avoid intervening at cross-purposes. Also, official interventions are much more effective when all the relevant central banks are involved because markets receive a much stronger signal that national governments have made a credible commitment.

And this all assumes the fed cares about inflation. It might not. It might be a ‘beggar thy neighbor’ policy where the fed is trying to steal aggregate demand from abroad and help the financial sector inflate its way out of debt.

That is what the markets are assuming when they price in another 75 in Fed Funds cuts over the next few quarters. The January fed meeting will be telling.

While they probably do ultimately care about inflation, they have yet to take any action to show it. And markets will not believe talk, just action.

This brings us to China, and all the misplaced concern over its exchange rate. Given the need to make a strong-dollar policy credible, it is perverse to bash the one country that has done the most to prevent a dollar free fall. China’s massive interventions to buy dollars have curbed a sharp dollar depreciation against the renminbi;

Yes, as part of their plan to be the world’s slaves – they work and produce, and we consume.

they have also filled America’s savings deficiency and financed its trade deficit.

That statement has the causation backwards.

It is US domestic credit expansion that funds China’s desires to accumulate $US financial assets and thereby support their exporters.

As the renminbi’s exchange rate is the linchpin for a raft of other Asian currencies, a sharp appreciation of the renminbi would put tremendous upward pressure on all the others — including Korea, Japan, Thailand and even India. Forcing China into a major renminbi appreciation would usher in another bout of dollar weakness and further unhinge inflation expectations in the U.S. It would also send a deflationary impulse abroad and destabilize the international financial system.

Yes, that’s a possibility.

Most of the world’s government reaction functions are everything but sustaining domestic demand.

China, with its huge foreign-exchange reserves (over $1.4 trillion), has another important role to play. Once the major industrial countries with convertible currencies — led by the ECB — agree to put a floor under the dollar, emerging markets with the largest dollar holdings — China and Saudi Arabia — must agree not to “diversify” into other convertible currencies such as the euro. Absent this agreement, the required interventions by, say, the ECB would be massive, throwing the strategy into question.

Politically, this is a non starter. The ECB has ideological issues, and the largest oil producers are ideologically at war with the US.

Cooperation is a win-win situation: The gross overvaluations of European currencies would be mitigated, large holders of dollar assets would be spared capital losses, and the U.S. would escape an inflationary conflagration associated with general dollar devaluation.

Not if the Saudis/Russians continue to hike prices, with biofuels causing food to follow as well. Inflation will continue to climb until crude prices subside for a considerable period of time.

For China to agree to all of this, however, the U.S. (and EU) must support a true strong-dollar policy — by ending counterproductive China bashing.

Mr. McKinnon is professor emeritus of economics at Stanford University and a senior fellow at the Stanford Institute for Economic Policy Research. Mr. Hanke is a professor of applied economics at Johns Hopkins University and a senior fellow at the Cato Institute.

Posted in Articles, Currencies, Energy, Fed | No Comments »


Posted by WARREN MOSLER on 30th December 2007


by Steve Hanke

US Mercantilist Machismo, China replaces Japan

The United States has recorded a trade deficit in each year since 1975.

That is a good thing – exports are real costs, imports benefits.

This is not surprising because savings in the US have been less than investment.

This is a tautology from the above misconceived notion and of no casual consequence.

The trade deficit can be reduced by some combination of lower government consumption, lower private consumption

Yes, if we get less net goods and services from non residents, our trade deficit goes down, as does our real terms of trade and our standard of living.

Real terms of trade are the real goods and services you export versus the real goods and services you import.

In economics, it is better to receive (real goods and services) than to give.

or lower private domestic investment.

We could (and would if ‘profitable’) ‘borrow to invest’ domestically (loans ‘create’ deposits, not applicable/no such thing as ‘borrowing from abroad’ etc.)

But said, domestic borrowing decreases ‘savings’ equal to the increased domestic investment (accounting identity). So, the trade gap would remain the same if we invested more or less via domestic funding.

So, his above statement is a tautology of no casual interest.

But you wouldn’t know it from listening to the rhetoric of Washington’s politicians and special interest groups. Many of them are intent on displaying their mercantilist machismo. This is unfortunate. A reduction of the trade deficit should not even be a primary objective of federal policy. Never mind. Washington seems to thrive on counter-productive trade “wars” that damage both the US and its trading partners.

Almost sounds like he gets it! But don’t get your hopes up..

From the early 1970s until 1995, Japan was an enemy. The mercantilists in Washington asserted that unfair Japanese trading practices caused the US trade deficit and that the US bilateral trade deficit with Japan could be reduced if the yen appreciated against the dollar.

Washington even tried to convince Tokyo that an ever-appreciating yen would be good for Japan. Unfortunately, the Japanese
complied and the yen appreciated, moving from 360 to the greenback in 1971 to 80 in 1995. In April 1995, Secretary of the Treasury Robert Rubin belatedly realized that the yen’s great appreciation was causing the Japanese economy to sink into a deflationary quagmire.

Actually, it was the fiscal surplus they allowed from 1987-1992 that drained net yen income and financial assets that removed support for the yen credit structure and ended the expansion.

In consequence, the US stopped arm-twisting the Japanese government about the value of the yen and Secretary Rubin began to evoke his now-famous strong-dollar mantra. But while this policy switch was welcomed, it was too late. Even today, Japan continues to suffer from the mess created by the yen’s appreciation.

The mess was created by the surplus and repeated attempts to reduce the following countercyclical deficits. Only when the deficit was left alone and grew to 7% of GDP a few years ago did the economy finally get the net income and financial assets it needed to recover. Only to be undermined recently by a political blunder regarding building codes. Japan should do better in 2008, as that obstacle is overcome.

As Japan’s economy stagnated, its contribution to the increasing US trade deficit declined, falling from its 1991 peak of almost 60% to about 11%.

Sad to see that happens. Now Americans have to build the cars here as their new factories are now in the US.

While Japan’s contribution declined, China’s surged from slightly more than 9% in 1990 to almost 28% last year.

Yes, they have workers willing to consume fewer calories than those in Japan.

With these trends, the Chinese yuan replaced the Japanese yen as the mercantilists’ whipping boy. Interestingly, the combined Japanese–Chinese contribution has actually declined from its 1991 peak of over 70% to only 39% last year. This hasn’t stopped the mercantilists from claiming that the Chinese yuan is grossly undervalued, and that this creates unfair Chinese competition and a US bilateral trade deficit with China.

The unfair part is their workers are willing to work for a lot less real consumption and become the world’s slaves via net exports.

And we don’t know how to sustain our own domestic demand via internal policy; so, our politicians blame the foreigners.

I was introduced to the Chinese currency controversy five years ago when I appeared as a witness before the US Senate Banking Committee on May 1, 2002. The purpose of those hearings was to determine, among other things, whether China was manipulating its exchange rate.

All state currencies are public monopolies, and value is a function of various fiscal/monetary policies. So in that sense, all currencies are necessarily ‘manipulated’ as all monopolists are inherently ‘price setters’.

So, this entire point is moot, though far from mute.

United States law requires the US Treasury Department, in consultation with the International Monetary Fund, to report biyearly as to whether countries – like China – are gaining an “unfair” competitive advantage in international trade by
manipulating their currencies.

Clearly no understanding that exports are real costs, and imports are real benefits. The entire worlds seems backwards on this.

The US Treasury failed to name China a currency manipulator back in May 2002, and it hasn’t done so since then. This isn’t too surprising since the term “currency manipulation” is hard to define and, therefore, is not an operational concept that can be used for economic analysis. The US Treasury acknowledged this fact in reports to the US Congress in 2005. But this fact has not stopped politicians and special interest groups in the United States, and elsewhere, from asserting that China manipulates the yuan.

Yes, to keep their wages low so they can produce, and we can consume.

Protectionists from both political parties in the US have threatened to impose tariffs on imported Chinese goods if Beijing does not dramatically appreciate the yuan. These protectionists even claim that China would be much better off if it allowed the yuan to become stronger vis-à-vis the US dollar.

They would – it would lower their net exports, a real benefit at the macro level.


This is not the first time US special interests have made assertions in the name of helping China. During his first term, Franklin D. Roosevelt delivered on a promise to do something to help silver producers. Using the authority granted by the Thomas Amendment of 1933 and the Silver Purchase Act of 1934, the Roosevelt Administration bought silver.

Can’t think of a better way to help a producer!

This, in addition to bullish rumors about US silver policies, helped push the price of silver up by 128% (calculated as
an annual average) in the 1932-35 period.

(It has gone up more here in the last three years without the government buying any.)

Bizarre arguments contributed mightily to the agitation for high silver prices. One centered on China and the fact that it was on the silver standard. Silver interests asserted that higher silver prices—which would bring with them an appreciation in the yuan—would benefit the Chinese by increasing their purchasing power.

Yes – whoever is long silver wins when the price goes up.

As a special committee of the US Senate reported in 1932, “silver is the measure of their wealth and purchasing power; it serves as a reserve, their bank account. This is wealth that enables such peoples to purchase our exports.”

Things didn’t work according to Washington’s scenario. As the dollar price of silver and of the yuan shot up, China was thrown into the jaws of depression and deflation. In the 1932-34 period, gross domestic product fell by 26% and wholesale prices in the capital city, Nanjing, fell by 20%.

In an attempt to secure relief from the economic hardships imposed by US silver policies, China sought modifications in the US
Treasury’s silver purchase program.

They didn’t know how to sustain domestic demand. They needed to float the currency, offer a public service job at a non disruptive wage to anyone willing and able to work, and leave the overnight risk free rate at 0%. (See ‘Full Employment and Price Stability‘.)

But its pleas fell on deaf ears.

Maybe ears with different special interests?

After many evasive replies, the Roosevelt Administration finally indicated on October 12, 1934 that it was merely carrying out a policy mandated by the US Congress. Realizing that all hope was lost, China was forced to effectively abandon the silver standard on October 14, 1934, though an official statement was postponed until November 3, 1935.

About the same time the US abandoned the gold standard domestically for much the same reason.

This spelled the beginning of the end for Chiang Kaishek’s Nationalist government.

He let unemployment go too high out of ignorance of how to sustain domestic demand. A common story throughout history.

History doesn’t have to repeat itself. Foreign politicians should stop bashing the Chinese about the yuan’s exchange rate. This would allow the Chinese to focus on important currency and trade issues: making the yuan fully convertible, respecting intellectual property rights and meeting accepted health and safety standards for their exports.

Why do we want to encourage anything that reduces their net exports???
(rhetorical question)

Steve H. Hanke is a Professor of Applied Economics at The Johns Hopkins University in Baltimore and a Senior Fellow at the Cato Institute in Washington, D.C.


Posted in Articles, USA | No Comments »

Friday mid day

Posted by WARREN MOSLER on 28th December 2007

Food, crude, metals up, dollar down, inflation up all over the world, well beyond CB ‘comfort levels.’

Nov new home sales continue weak, though there are probably fewer ‘desirable’ new homes priced to sell, and with starts are down the new supply will continue to be low for a while.

The December Chicago pmi was a bit higher than expected, probably due to export industries. Price index still high though off a touch from Nov highs.

So again it’s high inflation and soft gdp.

Markets continue to think the Fed doesn’t care about any level of inflation and subsequently discount larger rate cuts.

Mainstream theory says if inflation is rising demand is too high, no matter what level of gdp that happens to corresponds with. And by accommodating the headline cpi increases with low real interest rates, the theory says the Fed is losing it’s fight (and maybe its desire) to keep a relative value story from turning into an inflation story. This is also hurting long term output and employment, as low inflation is a necessary condition for optimal growth and employment long term.

A January fed funds cut with food and energy still rising and the $ still low will likely bring out a torrent of mainstream objections.

Posted in Energy, Fed, GDP, Interest Rates | No Comments »

2007-12-28 US Economic Releases

Posted by WARREN MOSLER on 28th December 2007

2007-12-28 Chicago Purchasing Manager

Chicago Purchasing Manager (Dec)

Survey 51.7
Actual 56.6
Prior 52.9
Revised n/a

Graph Looks Ok.

2007-12-28 New Home Sales

New Home Sales (Nov)

Survey 717K
Actual 647K
Prior 728K
Revised 711K

2007-12-28 New Home Sales MoM

New Home Sales MoM (Nov)

Survey -1.6%
Actual -9.0%
Prior 1.7%
Revised 1.7%

Still heading south, but less impact on GDP.

Also, fewer homes are being built.

Existing home sales Monday will mean more.

And during the winter months, seasonally, fewer months are built and sold; so, small absolute changes get magnified.

2007-12-28 Help Wanted Index

Help Wanted Index (Nov)

Survey 23
Actual 21
Prior 23
Revised 22

Working its way lower in line with a still strong, but softening labor market.

Most recent plunge seems to be related to CNBC gloom and doom talk that started in August.


Posted in Daily | No Comments »

Updated JGBi Index Ratio Table

Posted by WARREN MOSLER on 28th December 2007

(an interoffice email)

Hi Dave,

If core inflation is finally showing up in Japan that says a lot for world inflation in general!


On Dec 28, 2007 8:12 AM, Dave Vealey wrote:
> With last nights stronger then expected release of core inflation in Japan
> (+0.4% y/y vs. +0.3% expected), January will see linkers pickup another 0.10
> in their index ratio. Prior to last nights release the index ratio was
> expected to be unchanged for the month of Jan.
> DV

Posted in Email, Japan | No Comments »

Calories, Capital, Climate Spur Asian Anxiety

Posted by WARREN MOSLER on 28th December 2007

Higher oil prices mean lower rates from the Fed, and higher inflation rates induced by shortages mean stronger currencies abroad.

Why do I have so much trouble getting aboard this paradigm, and instead keep looking for reversals? Feels a lot like watching the NASDAQ go from 3500 to 5000 a few years ago.


Calories, Capital, Climate Spur Asian Anxiety

2007-12-26 17:51 (New York)
by Andy Mukherjee

(Bloomberg) — The new year may be a challenging one for Asian policy makers.

Year-end U.S. closing stocks for wheat are the lowest in six decades; soybeans in Chicago touched a 34-year peak this week. Palm oil in Malaysia climbed to a record yesterday.

The steeply rising cost of calories may be more than just cyclical, notes Rob Subbaraman, Lehman Brothers Holdings Inc. economist in Hong Kong. Growing use of food crops in biofuels and increasing demand for a protein-rich diet in developing countries may have pushed up prices more permanently.

The wholesale price of pork in China has surged 53 percent in the past year.

“Consumer inflationary expectations may soon rise, feeding into wage growth and core inflation, but we expect Asian central banks to be slow to react, initially due to slowing growth and later because of strong capital inflows,” Subbaraman says.

If the U.S. Federal Reserve continues easing interest rates to combat a housing-led economic slowdown, a surge in capital inflows into Asia may indeed become a stumbling block in managing the inflationary impact of higher commodity prices.

Food and energy account for more than two-fifths of the Chinese consumer-price index, compared with 17 percent for countries such as the U.K., U.S. and Canada, and 25 percent in the euro area, according to UBS AG economist Paul Donovan in London.

As Asian central banks raise interest rates — when the Fed is cutting them — they will invite even more foreign capital into the region. That will cause Asian currencies to appreciate, leading to a loss of competitiveness for the region’s exports.

Carbon Emissions

On the other hand, paring the domestic cost of money prematurely may worsen the inflation challenge.

That isn’t all.

Higher oil prices will also boost the attractiveness of coal as an energy source, delaying any meaningful reduction in carbon emissions in fast-growing Asian nations such as China and India.

As Daniel Gros, director of the Centre for European Policy Studies in Brussels, noted in recent research, the price of coal — relative to crude oil — has been halved since the end of 1999. And per unit of energy produced, coal is a much bigger pollutant than oil or gas.

This doesn’t augur well for the environment.

“Given that China is likely to install over the next decade more new power generation capacity than already exists in all of Europe, this implies that the current level of high oil prices provides incentive to make the Chinese economy even more intensive in carbon than it would otherwise be,” Gros said.

Beijing Olympics

Climate-related issues will be in the spotlight in Asia next year. China’s eagerness to use the Beijing Olympic Games to showcase solutions to its huge environmental challenges will be one of the “big things to watch for” in Asia in 2008, Spire Research and Consulting, a Singapore-based advisory firm, said last week.

Even if China succeeds in reducing air pollution during the Olympics, the improvements may not endure after the sporting event ends on Aug. 24, especially since the underlying economics continue to favor higher coal usage.

A drop in hydrocarbon prices might help check emissions and global warming, Gros noted last week on the Web site of

In fact, lower oil prices may also make food costs more stable by lessening the craze for biofuels.

That will leave capital flows as Asia’s No. 1 challenge in 2008. And it won’t be an easy one for policy makers to tackle.

Capital Inflows

Take India’s example.

The $900 billion economy has attracted $100 billion in capital in the 12 months through October, with a third of the money entering the country as overseas borrowings, according to Morgan Stanley economist Chetan Ahya in Singapore.

This has caused the rupee to appreciate more than 12 percent against the dollar this year, knocking off more than three percentage points from India’s inflation index, says Lombard Street Research economist Maya Bhandari in London.

Naturally, exporters are complaining.

So why doesn’t India cut domestic interest rates? It can’t do that without the risk of stoking inflation.

Money supply is growing at an annual pace of more than 21 percent in India, compared with the central bank’s target of between 17 percent and 17.5 percent. Inflation has held well below the central bank’s estimate of 5 percent for five straight months partly because of the government’s insistence on not passing the full cost of imported fuel to local consumers. It isn’t yet time for monetary easing in India.

China has it worse. Monetary conditions there remain dangerously loose. And China may be reluctant to do much about the undervalued yuan — the root cause of its record trade surpluses and the attendant liquidity glut — until the Olympics are out of the way.

Asian economies may, to a large extent, be insulated from the subprime mess. Still, 2008 won’t be all fun and games.

(Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are his own.)

–Editors: James Greiff, Ron Rhodes.

To contact the writer of this column:
Andy Mukherjee in Singapore at +65-6212-1591 or

To contact the editor responsible for this column:
James Greiff at +1-212-617-5801 or

Posted in Currencies, Interest Rates, Oil | No Comments »

2007-12-27 US Economic Releases

Posted by WARREN MOSLER on 27th December 2007

2007-12-27 MBAVPCH Index


2007-12-27 MBA Mortgage Application

MBA Mortgage Applications (Dec 21)

Survey n/a
Actual -7.6%
Prior 19.5%
Revised n/a

Goes down this time every year and bounces back early January.

2007-12-27 Durable Goods Orders

Durable Goods Orders (Nov)

Survey 2.0%
Actual 0.1%
Prior -0.4%
Revised -0.4%

2007-12-27 Durables Ex Transporation

Durable Goods Ex Transportation (Nov)

Survey 0.5%
Actual -0.7%
Prior -0.7%
Revised -0.9%

Still drifting lower over time.

Domestic demand has been gradually softening for about a year and a half, as the lower deficit hiked the financial obligation ratios to levels where the rate of consumer credit expansion peaked.

2007-12-27 Initial Jobless Claims

Initial Jobless Claims (Dec 22)

Survey 340K
Actual 349K
Prior 346K
Revised 348K

2007-12-27 Continuing Claims

Continuing Claims (Dec 15)

Survey 2645K
Actual 2713K
Prior 2646K
Revised 2638K

Drifting up very modestly.

2007-12-27 Consumer Confidence

Consumer Confidence (Dec)

Survey 86.5
Actual 88.6
Prior 87.3
Revised 87.8

CNBC gloominess peaked?


Posted in Daily | No Comments »

Italian budget deficit down towards 2%

Posted by WARREN MOSLER on 27th December 2007

Falling deficits in general in the Eurozone due to the growth rate of GDP combined and the countercyclical tax structure.

Aggregate demand from non government credit expansion (and some from exports) is supporting GDP as support from government deficit spending wanes. This can go on for quite a while as consumer leverage still has a lot of upside potential. However, it will self-destruct if allowed to continue long enough. And, as in the US, net exports have the potential to sustain growth in the medium term as well, though this is hard to fathom without a fall in the Euro.

I need to do more work on this as there are a lot of moving parts over there, including prospective members targeting their currencies, building Euro reserves (public and private), and tightening their fiscal balances. Additionally, portfolios have been rebalancing toward the Euro.

Overall, however, we enter 2008 with tightening fiscal balances in most countries. This will serve to keep a lid on demand and output, while rising food/energy will keep upward pressure on prices.

Italy’s 2007 public deficit about 2 pct of GDP

Prodi 27 Dec 2007 06:39 AM ET
Thomson Financial

Italy’s public deficit will be about 2 pct of GDP, compared with a government forecast of 2.5 pct, said prime minister Romano Prodi in his year-end address.

“We will close the year with a lower deficit, it will be around 2 pct, a figure below any forecast,” Prodi said. pw/ejb COPYRIGHT Copyright Thomson
Financial News Limited 2007. All rights reserved.

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gas demand +.9%

Posted by WARREN MOSLER on 26th December 2007

Give Saudi/Russians comfort that they can keep hiking.

And markets say Fed will keep ‘accommodating’.

So much for higher prices curbing demand!

DJ US Gasoline Demand +0.9% On Week – MasterCard SpendingPulse(DJ)

NEW YORK (Dow Jones)–U.S. gasoline demand for the week ended Dec. 21, measured by purchases at the pump, rose 0.9% from a week earlier, according to a report by MasterCard Advisors LLC, a division of MasterCard Inc. (MA). Gasoline demand increased by 597,000 barrels, or 85,286 barrels a day, to 67.919 million barrels, or 9.703 million barrels a day, last week, according to the report, which is compiled by SpendingPulse, a retail data service of MasterCard Advisors. The four-week average demand level was 65.518 million barrels, or 9.36 million barrels a day, MasterCard said, up from 96,429 barrels a day from a week ago. Retail gasoline prices fell 1 cent to an average $2.98 a gallon over the week, the report said. That is 28.4% higher than a year ago.

SpendingPulse is a macroeconomic indicator that reports on national retail sales and is based on aggregate sales activity in the MasterCard payments network, coupled with estimates for all other payment forms, including cash and check. MasterCard SpendingPulse doesn’t represent MasterCard financial performance. The Department of Energy is due to issue its weekly petroleum data, including gasoline demand, on Thursday at 10:30 a.m. EST.

The data, put out by the DOE’s Energy Information Administration statistics and analysis unit, doesn’t count how many gallons are sold. Instead, it offers a “Product Supplied,” or implied demand figure, in its weekly report. “Product Supplied” represents the total volume of gasoline that has moved on from refineries, pipelines, blending plants and terminals on its way to supplying retail stations.

-By Matt Chambers, Dow Jones Newswires; 201-938-2062;
Dow Jones Newswires
December 26, 2007 14:00 ET (19:00 GMT)
Copyright (c) 2007 Dow Jones & Company, Inc. – - 02 00 PM EST

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Saudi/Fed teamwork

Posted by WARREN MOSLER on 26th December 2007

Looks like markets are still trading with the assumption that as the Saudis/Russians hike prices the Fed will accommodate with rate cut.

That’s a pretty good incentive for more Saudi/Russian oil price hikes, as if they needed any!

Likewise, the US is a large exporter of grains and foods.

Those prices are now linked to crude via biofuels.

And the new US energy bill just passed with about $36 billion in subsidies for biofuels to help us keep burning up our food for fuel and keeping their prices linked.

This means cpi will continue to trend higher, and drag core up with it as costs get passed through via a variety of channels. In the early 70′s core didn’t go through 3% until cpi went through 6%, for example.

Ultimately everything is made of food and energy, and margins don’t contract forever with softer demand. In fact, much of the private sector is straight cost plus pricing, and govt is insensitive to ‘demand’ and insensitive to the prices of what it buys. And the US govt. indexes compensation and most transfer payments to (headline) cpi.

And while the US may be able to pay it’s rising oil bill with help from its rising export prices for food, much of the rest of the world is on the wrong end of both and will see its real terms of trade continue to deteriorate. Not to mention the likelihood of increased outright starvation as ultra low income people lose their ability to buy enough calories to stay alive as they compete with the more affluent filling up their tanks.

At the Jan 30 meeting I expect the Fed to be looking at accelerating inflation due to rising food/crude, and an economy muddling through with a q4 gdp forecast of 2-3%. Markets will be functioning, banks getting recapitalized, and while there has been a touch of spillover from Wall st. to Main st. the risk of a sudden, catastrophic collapse has to appear greatly diminished.

They have probably learned that the fed funds cuts did little or nothing for ‘market functioning’ and that the TAF brought ff/libor under control by accepting an expanded collateral list from its member banks.

(In fact, the TAF is functionally equiv of expanding the collateral accepted at the discount window, cutting the rate, and removing the stigma as recommended back in August and several times since.)

And they have to know their all important inflation expectations are at the verge of elevating.

They will know demand is strong enough to be driving up cpi, and the discussion will be the appropriate level of demand and the fed funds rate most likely to sustain non inflationary growth.

Their ‘forward looking’ models probably will still use futures prices, and with the contangos in the grains and energy markets, the forecasts will be for moderating prices. But by Jan 30 they will have seen a full 6 months of such forecasts turn out to be incorrect, and 6 months of futures prices not being reliable indicators of future inflation.

Feb ff futures are currently pricing in another 25 cut, indicating market consensus is the Fed still doesn’t care about inflation. Might be the case!


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2007-12-26 US Economic Releases

Posted by WARREN MOSLER on 26th December 2007

2007-12-26 S&P-Case Shiller Home Price Index

S&P/Case-Shiller Home Price Index (Oct)

Survey n/a
Actual 192.9
Prior 195.6
Revised 195.7

2007-12-26 S&P-CS Composite-20 YoY

S&P/CS Composite-20 YoY (Oct)

Survey -5.7%
Actual -6.1%
Prior 4.9%
Revised n/a

2007-12-26 S&P-Case-Shiller 20 MoM%

S&P/CS 20 MoM (Oct)

Survey n/a
Actual -1.42%
Prior -0.84%
Revised n/a
% Change -69.05%

2007-12-26 Home Price Index

S&P/Case-Shiller TABLE

Survey 1
Actual -4
Prior 0
Revised n/a

It’s a big city index and has been down more than broader measures. Biggest drops have come in Miami, Las Vegas, Detroit, and Los Angeles. Also, these are October numbers – old news now.

2007-12-26 Richmond Fed Manufacturing Index

Richmond Fed Manufacturing Index (Dec)

Survey 1
Actual -4
Prior 0
Revised n/a

2007-12-26 Richmond Fed Manufacturing TABLE

Redmond Manufacturing TABLE

Some weakness and higher prices.

2007-12-26 ABC Consumer Confidence

ABC Consumer Confidence (Dec 23)

Survey n/a
Actual -23
Prior -17

This was when CNBC was still gloomy. Now that CNBC has turned a bit more optimistic, maybe the number will turn up as well.


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Government spending and inflation comments

Posted by WARREN MOSLER on 24th December 2007

Government Spending (Trailing Twelve Months)

Note how the ‘soft spot’ in govt. spending corresponds to the softening in domestic demand. Fortunately exports have been expanding sufficiently to sustain reasonably high levels of GDP.

CRB Index

PCE Price Index

Looks like a full recovery from the Aug 06 gasoline price collapsed engineered by Goldman’s changing of their commodity index weightings?


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Strong gdp and high credit losses

Posted by WARREN MOSLER on 24th December 2007

CNBC just had a session on trying to reconcile high gdp with large credit losses. Seems they are now seeing the consumer clipping along at a +2.8% pace for Q4. No need to rehash my ongoing position that most if not all the losses announced in the last 6 months would have little or no effect on aggregate demand. Credit losses hurt demand when the result is a drop in spending. And yes, that happened big time when the subprime crisis took the bid away from would be subprime buyers who no longer qualified to buy a house. That probably took 1% away from gdp, and the subsequent increase in
exports kept gdp pretty much where it was. But that story has been behind us for over a year.

The Fed is not in a good place. They should now know that the TAF operation should have been done in August to keep libor priced where they wanted it. They should know by now losses per se don’t alter aggregate demand, but only rearrange financial assets. The should know the fall off in subprime buyers was offset by exports.

The problem was the FOMC- as demonstrated by their speeches and actions- did not have an adequate working understanding of monetary operations and reserve accounting back in August, and by limiting the current TAFs to $20 billion it seems they still don’t even understand that it’s about price, and not quantity. Too many members of the FOMC
are mostly likely in a fixed exchange rate paradigm, with its fix exchange rate/gold standard fractional reserve banking system that drove us into the great depression. With fixed exchange rates it’s a ‘loanable funds’ world. Banks are ‘reserve constrained.’ Reserves and consequently ‘money supply’ are issues. Government solvency is an issue.

With today’s floating exchange rate regime none of that is applicable. The causation is ‘loans create deposits AND reserves,’ and bank capital is endogenous. There are no ‘imbalances’ as all current conditions are ‘priced’ in the fx market, including ANY sized trade gap, budget deficit, or rate of inflation.

The recession risk today is from a lack of effective demand. There are lots of ways this can happen- sudden drop in govt spending, sudden tax increase, consumers change ‘savings desires’ and cut back spending, sudden drop in exports, etc.- and in any case the govt can instantly fill in the gap with net spending to sustain demand at any level it desires. Yes, there will be inflation consequences, distribution consequences, but no govt. solvency consequences.

So yes, there is always the possibility of a recession. And domestic demand (without exports) has been moderating as the falling govt budget acts to reduce aggregate demand. But the rearranging of financial assets in this ‘great repricing of risk’ doesn’t necessarily reduce aggregate demand.

Meanwhile, the Saudis, as swing producer, keep raising the price of crude, and so far with no fall off in the demand for their crude at current prices, so they are incented to keep right on hiking. And they may even recognize that by spending their new found revenues on real goods and services (note the new mid east infrastructure projects in progress) they keep the world economy afloat and can keep hiking prices indefinitely.

And food is linked to fuel via biofuels, and as we continue to burn up every larger chunks of our food supply for fuel prices will keep rising.

The $US is probably stable to firm at current levels vs the non commodity currencies, as portfolio shifts have run their course, and these shifts have driven the $ down to levels where there are ‘real buyers’ as evidenced by rapidly growing exports.

Back to the Fed – they have cut 100 bp into the triple negative supply shock of food, crude, and the $/imported prices, due to blind fear of ‘market functioning’ that turned out to need nothing more than an open market operation with expanded acceptable bank collateral (the TAF program). If they had done that immediately (they had more than one outsider and insider recommend it) and fed funds/libor spreads and other ‘financial conditions’ moderated, would they have cut?

There has been no sign of ‘spillover’ into gdp from the great repricing of risk, food and crude have driven their various inflation measures to very uncomfortable levels,and they now believe they have ‘cooked in’ 100 bp of inflationary easing into the economy that works with about a one year lag.

Merry Christmas!


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Re: Is $700 billion a big number

Posted by WARREN MOSLER on 23rd December 2007

(an email and an article)

On Dec 23, 2007 5:37 PM, Russell Huntley wrote:
> For a very bearish take on the credit crisis, see: Crisis may make 1929 look
> a ‘walk in the park’. The article includes a $700 billion loss estimate from
> the head of credit at Barclays capital:
> Goldman Sachs caused shock last month when it predicted that total crunch
> losses would reach $500bn,

Yes, could be. Rearranging of financial assets.

leading to a $2 trillion contraction in lending
> as bank multiples kick into reverse.

I don’t see this as a consequence. Bank lending will go in reverse only if there are no profitable loans to be made.

With floating exchange rates, bank capital in endogenous and will respond to returns on equity.

This already seems humdrum.
> “Our counterparties are telling us that losses may reach $700bn,” says Rob
> McAdie, head of credit at Barclays Capital. Where will it end? The big banks
> face a further $200bn of defaults in commercial property. On it goes.

Been less than 100 billion so far. Maybe they are talking cumulatively over the next five years?

> UPDATE: My main interest in this article was the quote from Barclays
> Capital. There has been a growing agreement that the mortgage credit crisis
> would result in losses of perhaps $400B to $500B; this is the first estimate
> I’ve seen significantly above that number.
> I noted last week that a $1+ trillion mortgage loss number is possible if it
> becomes socially acceptable for the middle class to walk away from their
> upside down mortgages.

Historically, people just don’t walk out onto the streets. They are personally liable for the payments regardless of current equity positions, and incomes are still strong, nationally broader surveys show home prices still up a tad ear over year.

Yes, some condo flippers and speculators will walk. But demand from that source has already gone to zero – did so over a yar ago, so that doesn’t alter aggregate demand from this point.

And that doesn’t include losses in CRE, corporate
> debt and the decrease in household net worth.

Different things, but again, the key to GDP is whether demand will hold up, including exports.

And probably half of aggregate demand comes directly or indirectly from the government. Don’t see that going negative. And AMT tax just cut fifty billion for 2008 will help demand marginally.

> The S&L crisis was $160B, so even adjusting for inflation, the current
> crisis is much worse than the S&L crisis (see page 13 of this GAO document).

That was net government losses? Shareholders/investors lost a lot more?

And a $1 trillion per day move in the world equity values happens all the time.

Q4 GPD being revised up to the 2% range. This has happened every quarter for quite a while.

Yes, it can all fall apart, but it hasn’t happened yet. And while there are risks to demand, negative GDP is far from obvious. Those predicting recessions mainly use yield curve correlations with past cycles and things like that.

Interesting that the one thing that is ‘real’ and currently happening is ‘inflation’, which the fed doesn’t seem to care about. And it won’t stop until crude stops climbing.


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It’s been hard for me to get in sync with markets where higher energy prices mean lower interest rates!

Posted by WARREN MOSLER on 21st December 2007


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Repo Mkts and TAF

Posted by WARREN MOSLER on 21st December 2007

(an interoffice email)

On 12/21/07, Pat Doyle
> It is becoming apparent that the funding pressures for year end are ebbing.
> The ease in pressure has a lot to do with the TAF and coordinated CBK
> interventions. The Fed is getting the cash to the people who need it.
> Discount window borrowings have been slowly climbing as well approx 4.6bb
> now. The Fed statement that they will provide this TAF facility for as long
> as needed is easing concerns amongst banks and providing a reliable source
> of funding for “hard to fund” assets.

Should have done this in August!
> There is and has been a lot of cash in the markets still looking for a home.
> Balance sheets are slowly cleaning up but balance sheet premiums (repo) will
> remain stubbornly high as long as the level 3 type assets remain on
> dealer/bank balance sheets.
> The current spread between the 1×4 FRA vs. 1×4 OIS is 57bps..

This looks like a good play – seems unlikely LIBOR will be at a wider spread than the discount rate. Load up the truck?

1×2 FRA vs.
> 1×2 OIS is 40bps. Spot 1mos LIBOR VS 1MOS FFs is 4.86 vs. 4.25 or 61bps.
> These spreads still represent continued unwillingness to lend in the
> interbank market and also illustrate a steeper credit curve.
> Turn funding has not changed substantially. While funding appears to be
> stabilizing, balance sheets are still bloated and capital ratios are still
> under pressure therefore balance sheets will remain expensive in repo land.
> From another bank;
> Mortgages over the year-end turn traded at 5.25 today, which we still feel
> is a good buy here considering the amount of liquidity the fed has been
> dumping
> into the system as of late (via the TAF and standard RP operations) and the
> expectation that they will continue to do so on Dec 31. Treasuries also
> traded
> over the turn traded today at 2.50, the first treasury turn trade we’ve seen
> in
> quite some time.
> Yesterday Tsy GC O/N’s backed up from the low 3s to 3.70. The FED has been
> actively trying to increase the supply of treasuries in the repo markets.
> AGENCY MBS repo has been steadily improving. 1mos OIS vs 1mos AGCY MBS has
> gone from a spreads of 63bps last week to 15bps last night. And spreads to
> 1month LIBOR have widened by 33bps AGCY MBS from L-23 12/13 to L-56 12/20.
> Again LIBOR still showing the unwillingness of banks to lend to each other.
> -Pat
> Patrick D. Doyle Jr.
> AVM, L.P. / III Associates
> 777 Yamato Road
> Suite 300
> Boca Raton, Fl. 33431
> 561-544-4575


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Philly fed numbers from yesterday

Posted by WARREN MOSLER on 21st December 2007

2007-12-21 Philly Fed Bus Outlook Index

The detail is of interest – no sign of weakness here.

Prices still very firm.

New orders and shipments strong.

Work week higher.

Inventories down due to shipments up – seems to have caused all the headline ‘weakness’.


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2007-12-21 US Economic Releases

Posted by WARREN MOSLER on 21st December 2007

2007-12-21 Personal Income

Personal Income (Nov)

Survey 0.5%
Actual 0.4%
Prior 0.2%
Revised n/a

OK number.

2007-12-21 Personal Spending

Personal Spending (Nov)

Survey 0.7%
Actual 1.1%
Prior 0.2%
Revised 0.4%

Nice bounce back from a low number also revised up. Makes the two month average about 0.75%. This will cause further upward revisions of Q4 GDP.

2007-12-21 PCE Deflator YoY

PCE Deflator YoY (Nov)

Survey 3.4%
Actual 3.6%
Prior 2.9%
Revised 3.0%

Back to my favorite quote from September, ‘If the fed doesn’t care about inflation, why should I?’

Wonder what it takes for the fed to care?

2007-12-21 PCE Core MoM

PCE Core MoM (Nov)

Survey 0.2%
Actual 0.2%
Prior 0.2%
Revised n/a

2007-12-21 PCE Core YoY

PCE Core YoY (Nov)

Survey 2.0%
Actual 2.2%
Prior 1.9%
Revised 2.0%

Core at or though fed’s upper bound.


U. of Michigan Confidence (Dec F)

Survey 74.5
Actual 75.5
Prior 74.5
Revised 2.0%

People still watching CNBC.

2007-12-21 Inflation Expecations - 1 Year Ahead

Inflation Expectations – 1 Year Ahead

Survey n/a
Actual 3.4%
Prior 3.2%
Revised n/a

One of the fed’s indicators – don’t like this action as they think once it elevates it’s too late.

2007-12-21 Inflation Expecations - 5 Years Ahead

Inflation Expectations – 5 Years Ahead

Survey n/a
Actual 3.1%
Prior 2.8%
Revised n/a

As above – once it elevates it’s too late.


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