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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Archive for September, 2008

Statement of Senator Obama on moving financial legislation forward

Posted by WARREN MOSLER on 30th September 2008

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Statement of Senator Obama on Moving Financial Legislation Forward

Yesterday, within the course of a few hours, the failure to pass the economic rescue plan in Washington led to the single largest decline of the stock market in two decades.

Might have been worse if they had passed the plan!!!

While I, like others, am outraged that the reign of irresponsibility on Wall Street and in Washington has created the current crisis,

All a result of institutional structure that put the incentives in place in place to do what was done.

Including the way Washington works.

I also know that continued inaction in the face of the gathering storm in our financial markets would be catastrophic for our economy and our families.

At this moment, when the jobs, retirement savings, and economic security of all Americans hang in the balance, it is imperative that all of us – Democrats and Republicans alike – come together to meet this crisis.

The bill rejected yesterday was a marked improvement over the original blank check proposed by the Bush Administration. It included restraints on CEO pay, protections for homeowners, strict oversight as to how the money is spent, and an assurance that taxpayers will recover their money
once the economy recovers.

None of that matters for the ‘success’ of the plan which is doubtful, as it’s not much more than an asset swap, and with the changes, the additions of incentives for CEOs not to participate.

Given the progress we have made, I believe we are unlikely to succeed if we start from scratch or reopen negotiations about the core elements of the agreement. But in order to pass this plan, we must do more.

One step we could take to potentially broaden support for the legislation and shore up our economy would be to expand federal deposit insurance for families and small businesses across America who have invested their money in our banks.

The majority of American families should rest assured that the deposits they have in our banks are safe. Thanks to measures put in place during the Great Depression, deposits of up to $100,000 are guaranteed by the federal government.

While that guarantee is more than adequate for most families, it is insufficient for many small businesses that maintain bank accounts to meet their payroll, buy their supplies, and invest in expanding and creating jobs. The current insurance limit of $100,000 was set 28 years ago and has not been adjusted for inflation.

That is why today, I am proposing that we also raise the FDIC limit to $250,000 as part of the economic rescue package – a step that would boost small businesses, make our banking system more secure, and help restore public confidence in our financial system.

Misses the point. Moving to $250,000 does nothing for the banking system. The cap needs to be removed, and the Fed given the mandate to lend unsecured to member banks in unlimited quantities.

Institutionally, this can be facilitated by extending FDIC insurance to Fed deposits at member banks.

That way, any ultimate bank insolvencies and losses continue to be charged to the FDIC.

I will be talking to leaders and members of Congress later today to offer this idea and urge them to act without delay to pass a rescue plan,” said Barack Obama.

A baby step in the right direction.

Not enough to make a difference.

Doesn’t address the issue of aggregate demand and homeowner’s ability to pay as employment stagnates.


Posted in Obama, Political | 6 Comments »

Re: Mosler plan, short version

Posted by WARREN MOSLER on 30th September 2008

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>   Warren,
>   I like adding the tax holiday.

Thanks, we were all pushing that as a better alternative than the Bush tax cut plan 5 or so years ago.

While not as constructive as, for example, an infrastructure project, and likely to drive up energy consumption, it will get immediate results, ‘cure’ the financial crisis (people will better afford their mortgage payments) and the ‘recession,’ and is far better than what they are proposing which does little or nothing.

>   Why do you want the Fed to establish 1 month, 2 month, and 3 month rates?

To eliminate interbank markets domestically at least out that far. Six months would be even better, and 30 years even better, but at some point it gets beyond political understanding, and most of the benefit comes from the very front of the curve where most of the interbank lending takes place, or tries to!


Posted in Email | No Comments »

Mosler Plan, short version

Posted by WARREN MOSLER on 30th September 2008

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Short version updated for current events.

If you agree, please distribute, including your Congressman, Fed officials, FDIC contacts, etc.

  1. Have the FDIC remove the $100,000 cap on deposits and extend insurance coverage to include Fed deposits at member banks.
  1. Have the Fed set 1 month, 2 month, and 3 month lending rates for member banks in addition to the fed funds rate, which, with the above, it can now lend to unsecured in unlimited quantities on demand.
  2. This:

    • Instantly normalizes bank liquidity, returning it to where it was designed to be all along.
    • Largely eliminates the need for banks to use the interbank market.
      functionally replaces the TAF and the Treasury lending facility without their shortcomings.
  1. Declare a payroll tax holiday and have Congress put the full faith and credit of the US behind all social security and medicare to eliminate the function of the trust fund regarding solvency.
  2. This supports demand. The taxes can be restored as needed should the economy be deemed ‘too hot’.

  • Crisis ends within hours.
  • Markets recover instantly.
  • Economy recovers instantly.
  • Financial sector muddles through as restored incomes and growth allow the institutions to grow out of their issues.

This can be looked as a plan that ‘gives the tax payers their money back’ vs the reverse from the current TARP that has no direct effect on anything in any case.


Posted in Proposal | 14 Comments »

Telegraph: Eurozone risks

Posted by WARREN MOSLER on 30th September 2008

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Highlights are in yellow. Problem is it needs a fiscal response, and this all has nothing to do with interest rates.

Banking crash hits Europe as ECB loses traction

by Ambrose Evans-Pritchard

(Telegraph) Analysts say German finance minister Peer Steinbrueck may have spoken too soon when he crowed last week that the US would lose its status as a superpower as a result of this crisis. He told Der Spiegel yesterday that we are “all staring into the abyss.”

Germany — over-leveraged to Asian demand for machine tools, and Mid-East and Russian demand for luxury cars — is perhaps in equally deep trouble, though of a different kind.

The combined crises at both Fortis and Dexia have sent tremors through Belgium, which is already traumatized by political civil war between the Flemings and Walloons. Fortis is Belgium’s the biggest private employer.

It is unclear whether the country has the resources to bail out two banks with liabilities that dwarf the economy if the crisis deepens, although a joint intervention by the Netherlands and Luxembourg to rescue Fortis has helped Belgium share the risk. Together the three states put E11.2 billion to buy Fortis stock.

This tripartite model is unlikely to work so well in others parts of Europe, since Benelux already operates as a closely linked team. The EU lacks a single treasury to take charge in a fast-moving crisis, leaving a patchwork of regulators and conflicting agendas.

Carsten Brzenski, chief economist at ING in Brussels, said the global crisis was now engulfing Europe with devastating speed.

We are at imminent risk of a credit crunch. Key markets are not functioning properly. The Europeans thought the sub-prime crisis was just American rubbish that the US should clean up itself, but now they are finding out that it is their rubbish too,” he said.

Data from the International Monetary Fund shows that European banks hold 75 percent as much exposure to toxic US housing debt as US banks themselves. Moreover they have mounting bad debts from the British, Spanish, French, Dutch, Scandinavian, and East European housing markets, where property bubbles reached even more extreme levels that in the US.

The interest spread between Italian 10-year bonds and German Bunds have ballooned to 92 basis points, the highest since the launch of the euro. Bond traders warn that the spreads are starting to reflect a serious risk of European Monetary Union breakup and could spiral out of control in a self-feeding effect.

As the eurozone slides into recession, the ECB is coming under intense criticism for keeping monetary policy too tight. The decision to raise rates into the teeth of the crisis in July has been slammed as overkill by the political leaders in France, Spain, and Italy.

Mr Sarkozy has called an emergency meeting of the EU’s big five powers next week to fashion a response to the crisis.

Half of the ECB’s shadow council have called for a rate cut this week, insisting that the German-led bloc of ECB governors have overstated the inflation risk caused by the oil spike earlier this year.

Jacques Cailloux, Europe economist at RBS, said the hawks had won a Pyrrhic victory by imposing their hardline monetary edicts on Europe. “They have won a battle but lost the war. The July decision will hardly go down in history books as a great policy decision,” he said.


Posted in Articles, ECB | No Comments »

2008-09-30 USER

Posted by WARREN MOSLER on 30th September 2008

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ICSC UBS Store Sales YoY (Sep 30)

Survey n/a
Actual 1.10%
Prior 1.30%
Revised n/a

Still positive but weak.


ICSC UBS Store Sales WoW (Sep 30)

Survey n/a
Actual -0.20%
Prior -1.00%
Revised n/a


Redbook Store Sales Weekly YoY (Sep 30)

Survey n/a
Actual 1.00%
Prior 1.20%
Revised n/a

Still positive but weak.


Redbook Store Sales MoM (Sep 30)

Survey n/a
Actual -1.30%
Prior -1.20%
Revised n/a


ICSC UBS Redbook Comparison TABLE (Sep 30)


S&P CS Composite 20 YoY (Jul)

Survey -16.00%
Actual -16.35%
Prior -15.92%
Revised -15.91%

Down year over year, but the rate of decline has slowed.


S&P Case Shiller Home Price Index (Jul)

Survey 166.90
Actual 166.23
Prior 167.69
Revised 167.71

Decelerating rate of decline.


S&P Case Shiller Home Price Index MoM (Jul)

Survey n/a
Actual -0.88%
Prior -0.52%
Revised n/a

From this angle it looks like the declines have moderated and could soon be over as inventories shrink and incomes continue higher.


Case Shiller ALLX 1 (Jul)


Case Shiller ALLX 2 (Jul)


Chicago Purchasing Manager (Sep)

Survey 53.0
Actual 56.7
Prior 57.9
Revised n/a

Better than expected and remaining above 50. Employment moved up to 49.


Chicago Purchasing Manager TABLE 1 (Sep)

Employment gapped up to 49?


Chicago Purchasing Manager TABLE 2 (Sep)


NAPM-Milwaukee (Sep)

Survey 44.0
Actual 46.0
Prior 43.0
Revised n/a

Better than expected and working its way out of the hole.


Consumer Confidence (Sep)

Survey 55.0
Actual 59.8
Prior 56.9
Revised 58.5

Even this is moving up some though from very low levels, and as of September 23.


Consumer Confidence ALLX 1 (Sep)


Consumer Confidence ALLX 2 (Sep)


Posted in Daily | No Comments »

Time for a payroll tax holiday

Posted by Sada Mosler on 29th September 2008

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Time for something they can all understand that would turn it all around like it never happened: a payroll tax holiday until the economy recovers.

It favors lower income workers.

It’s an immediate add to aggregate demand of over 3% per year annualized.

It lowers costs for businesses to help keep prices in check.

They can phase it back in to cool things down if the economy overheats.

And it would be a good time for Congress to put its full faith and credit behind promised social security checks regardless of the trust fund reserves.


Posted in Proposal | 27 Comments »

Can the euro payments system last the week?

Posted by Sada Mosler on 29th September 2008

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Euro equities and banks are now under attack, and the ECB is effectively borrowing hundreds of billions USD from the Fed via swap lines. The eurozone deposit insurance is by the national governments, not the ECN, which are credit constrained.

National government euro bonds have been supported by various CB/monetary authority allocations that are slowing with slowing net exports.

A major bank failure becomes infinitely more problematic in the eurozone than in the US, Japan, or UK, all who have deposit insurance at the ‘federal’ level.

The risk in the eurozone is the payments system completely shuts down, and re opens only when the ECB is allowed to conduct what amounts to fiscal transfers.

In a crunch, USD borrowings will need to be serviced from selling euros to buy USD and result in a sharply falling euro.

Yields on the national government bonds will move sharply higher due to credit concerns, as will credit default premiums in general.

For 10 years the euro ‘system’ has functioned reasonably well on the way up.

The systemic risk is only on the way down. And once in motion, it will unwind very quickly.

Protect yourself by not having any euro deposits, buying out of the money puts on the national government bonds and out of the money puts on the euro.

And then hope you lose those bets!


Posted in Banking, CBs, Currencies, ECB | 13 Comments »

Elaboration on the Mosler Plan

Posted by Sada Mosler on 29th September 2008

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The combination of removing the FDIC cap and extending FDIC insurance to include Fed deposits at member banks will normalize bank liquidity instantly, and at no ‘cost’ to government, by removing these ‘self-imposed constraints’ on bank liquidity that serve no function beyond contributing to the current liquidity crisis.

Supporting demand is a separate matter. Supporting lending will help, but there is no substitute for supporting incomes.

The TARP will not normalize bank liquidity or add to demand. It’s just an asset exchange. Not a bad thing, but nothing that dramatically changes anything.

And, unfortunately, and not to further complicate matters regarding the financial crisis, anything that does succeed in restoring growth will increase gasoline consumption and support prices at new highs in short order.

The over riding theme for Congress is the notion of ‘public purpose’.

New comments highlighted in yellow:

  1. Money fund issue:

    Remove the $100,000 cap on insured bank deposits. This adds no risk to government. And it will eliminate the need for money funds which the cap created in the first place.

Reasons for the cap: small banks will lose money to large banks.

When combined with 5., below, the Fed lending unsecured and in any size to any solvent member bank this objection vanishes:

  1. Banks:

    Lower the discount rate to the fed funds target rate and eliminate the need for collateral. This is how it should have been anyway. This goes hand in hand with eliminating the cap on FDIC insured deposits. The easiest way to facilitate this may be to extend FDIC insurance to Fed deposits at member banks. Then the Fed won’t need to demand collateral when it lends, and that alone will go a long way to normalizing bank liquidity. This would also mean banks would pay for FDIC insurance on any Fed deposits.

    Bank assets and solvency are already highly regulated, and how they are funded doesn’t alter the risk of loss due to insolvency for the government.

    An interbank market serves no public purpose. Eliminate it out to six months by offering discount lending out to 6 months.

    If banks can borrow all they want from the Fed they have no reason to borrow from each other.

    In addition to the FOMC setting the fed funds rate target, it can also set the rate for 3 and 6 month borrowing at the discount window. This both gets the job done and also replaces the TAF and TSLF type of experiments.

The banking model that has served us well since the depression provides for:

  • Deposit insurance to prevent runs on banks, the eliminating the liability side as the place of market discipline. There was and is a good reason for this- it doesn’t work, and never has worked. In fact, using bank liabilities for market discipline is what triggered the bank runs of the early 1930′s and before, that resulted in the rule changes. Let me suggest it is counterproductive to let a bank like WAMU fail for, as stated by the FDIC, liquidity reasons and not insolvency.
  • Strict regulation of capital ratios, loan (asset) quality, diversification, interest rate risk, etc.

    Loan quality is measured by credit analysis, and not mark to market, also to better serve public purpose. Banking is a matter of liabilities provided either directly or indirectly by government, and regulated and supervised assets.

  1. Broker/dealers:

    Let them go. If they don’t survive, at worst their assets will be distributed by the bankruptcy court if it goes that far. They do nothing that I know of that serves public purpose and/or the real economy that banks can’t do. And the banks are already regulated and supervised.

  1. Insurance companies:

    Policy holders should be government insured and insurance company assets, and capital regulation should be updated. You will know insurance regulation doesn’t go far enough if there are too many government losses to make policy holders whole.

    AIG got short credit (sold insurance on securities at low prices) and lost all their capital as risk and the price of insurance went up. Looks to me like a failure of regulation that allowed that much risk.

  1. Home ownership:

    Continue to fund the agencies via the Treasury to keep costs of funds at a minimum.

    Have the agencies ‘buy and hold’ new originations, and thereby eliminate that portion of the secondary markets. The secondary markets serve no public purpose, beyond working past flaws in the institutional structure that should instead be addressed.

    Increase and enforce criminal penalties for mortgage application fraud. Its functionally the same as robbing a bank.

To the question of how to keep homeowners in their properties if it decided that suits public purpose:

  • Use the existing housing agencies to buy foreclosed properties at the lower of the mortgage balance or the appraised value.
  • Allow the agencies to rent to the prior owner at a fair market rent.
  • Give the owner a minimum of 1 year to arrange to buy his house back from the government.
  • Allow the housing agencies the right to sell the house on the market after one year is not already sold to the prior owner.

This will be a major administrative effort, but it’s the only way I can see to get that job done.

  1. Growth and employment:

    Offer (directly or indirectly) a Federally funded $8 per hour full time job to anyone willing and able to work that includes health care benefits. An employed buffer stock is a more effective stabilizer and price anchor. It’s also less costly in real terms, than the unemployed buffer stock we currently maintain.

    Eliminate the various payroll taxes as needed to sustain demand.

    Implement needed infrastructure upgrades and repairs.

The financial sector needs the above three proposals to restore long term solvency. Their financial assets are only as good as the borrower’s ability to make his payments. There is no substitute for rising employment and incomes to support all sectors, including the financial sector.

The quickest and easiest way to support demand would be a payroll tax holiday that doesn’t end until the economy recovers as desired.

  1. con’td

    Eliminate health care as a marginal cost of production. People aren’t more likely to get ill if they are employed; in fact, the opposite is likely the case.

    The current system distorts pricing, and results in a suboptimal outcome for the economy’s ability to sustain prosperity.

This is the absolute argument against business paying for health care. No economist would disagree, but it seems to get ignored.

Once again we are seeing that using the liability side of banking for market discipline doesn’t work.

That’s why deposit insurance exists in every sustainable banking system in the world.

The remaining weak link in US banking system liquidity is the interbank market.

The reason we have an interbank market is the remaining institutional structure that utilizes the liability side of banking for market discipline.

This includes the $100,000 cap on FDIC insured bank deposits, and the Fed demanding collateral from banks when it lends.

Remove these two remaining obstacles for Fed member banks, and bank liquidity normalizes with no ‘cost’ or additional risk to government.

Unfortunately, no one in government seems to comprehend basic monetary operations and reserve accounting.


Posted in Banking | No Comments »

Re: Fed goes ballistic

Posted by WARREN MOSLER on 29th September 2008

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(email exchange)

>   This morning the Fed announced a massive expansion of its dollar liquidity
>   facilities. Three measures were announced: (1) an increase in total TAF
>   auctions from $150 billion to $300 billion, all coming in 84-day funds (2)
>   forward TAF auctions of an additional $150 billion, with the auctions to be
>   conducted in November for funds available for one or two weeks surrounding
>   the year-end and

The TAF would be unlimited, unsecured, and the Fed would set the rate in advance if they had a clear understanding of reserve accounting and monetary operations. It’s about price, not quantity.

>   (3) an increase in the currency swaps with foreign central banks (ECB, BoE,
>   BoC, BoJ, SNB, RBA, and the Scandis) taking the total outstanding from $290
>   billion to $620 billion. In addition, these swap lines were extended through
>   April 30, 2009; previously they were authorized through January 30, 2009.

This is a different matter, and more serious and disturbing- foreign central banks borrowing $ from the Fed to support the $ needs of their local banking systems.

Should those banking systems go down and this program gets large enough it could take down their currencies like any other external debt.


Posted in Currencies, Email, Fed | 10 Comments »

2008-09-29 Weekly Credit Graph Packet

Posted by WARREN MOSLER on 29th September 2008

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IG On the Run Spreads (Sep 29)


IG6 Spreads (Sep 29)


IG7 Spreads (Sep 29)


IG8 Spreads (Sep 29)


IG9 Spreads (Sep 29)


Posted in Credit | 1 Comment »

2008-09-29 USER

Posted by WARREN MOSLER on 29th September 2008

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Personal Income MoM (Aug)

Survey 0.2%
Actual 0.5%
Prior -0.7%
Revised -0.6%

Better than expected and prior month revised up a tenth. Fiscal packages don’t fade as quickly as the mainstream guesses.


Personal Income YoY (Aug)

Survey n/a
Actual 4.6%
Prior 4.5%
Revised n/a

Good enough to keep GDP muddling through, though the financial crisis could slow spending down some.


Personal Income ALLX (Aug)


Personal Consumption MoM (Aug)

Survey 0.2%
Actual 0.0%
Prior 0.2%
Revised 0.1%

Less than expected even though income holding up, and prior revised up a tenth. Income in excess of spending doesn’t usually persist.


Personal Consumption YoY (Aug)

Survey n/a
Actual 4.6%
Prior 4.9%
Revised n/a

On the soft side and continuing its gradual decline.


PCE Deflator YoY (Aug)

Survey 4.5%
Actual 4.5%
Prior 4.5%
Revised 4.6%

As expected and too high for Fed comfort.


PCE Core MoM (Aug)

Survey 0.2%
Actual 0.2%
Prior 0.3%
Revised n/a

Remains firm.


PCE Core YoY (Aug)

Survey 2.4%
Actual 2.6%
Prior 2.4%
Revised 2.5%

Higher than expected, prior revised up a tenth, and looks to be breaking out. Not encouraging for the Fed. They want it below 2.0%.

Karim writes:

  • Nominal PCE unchanged in August after two consecutive declines.

  • Real consumer spending tracking -2.0% (annualized) thus far in Q3.

  • Inventory rebound should keep GDP positive in Q3.

  • Core deflator up 0.2% m/m and 2.6% y/y.


Posted in Daily | No Comments »

WAMU and IndyMac — the perils of accounting control fraud and desupervision

Posted by Sada Mosler on 26th September 2008

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Just saw a regulator on TV saying WAMU went down due to ‘liquidity’ as they were running out of funds to give to fleeing depositors.

He also said it was not at capital problem, just a liquidity problem.

Taking him at his word (just for the purpose of making the following point), this totally flies in the face of our banking model and should not be allowed to happen.

It serves no public purpose to close a bank due to ‘liquidity’ when it has more than adequate capital.

It does serve public purpose to remove the issue of bank liquidity completely and let the Fed lend unsecured to ‘adequately capitalized banks’.

Anything less, like what the regulator says happened, is unnecessarily destabilizing and counter to public purpose.

If WAMU is in fact insolvent due to insufficient capital to cover losses on a matched maturity, hold to maturity basis, yes, it should be closed down. And that very well may have been the case, and the regulators may not have been doing their jobs in the public interest.


Posted in Banking | 7 Comments »

Banking model

Posted by Sada Mosler on 26th September 2008

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Once again, we are seeing that using the liability side of banking for market discipline doesn’t work.

That’s why deposit insurance exists in every sustainable banking system in the world.

It’s also why a floating foreign exchange rate is ‘superior’ to a fixed foreign exchange rate. With fixed foreign exchange rates, there is no such thing as credible deposit insurance.

The remaining weak link in US banking system liquidity is the interbank market.

The reason we have an interbank market is the remaining institutional structure that utilizes the liability side of banking for market discipline.

This includes the $100,000 cap on FDIC insured bank deposits and the Fed demanding collateral from banks when it lends.

Remove these two remaining obstacles for Fed member banks, and bank liquidity normalizes with no ‘cost’ or additional risk to government.

Unfortunately, no one in government seems to comprehend basic monetary operations and reserve accounting.

Including most if not all of the FOMC and the Treasury Secretary.


Posted in Banking | 11 Comments »

2008-09-26 EU News Highlights

Posted by Sada Mosler on 26th September 2008

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France and the eurozone are looking pretty grim.

Exports are weak as demand from the US for imports slows.

Rising prices from energy prices that have driven up ‘inflation’ are in the hands of the Saudis and Russians.

Rising budget deficits are both necessary to sustain growth and threatening national solvency.

The eurozone has used a chronic shortfall of domestic demand to drive exports and sustain growth. When they had their own currencies, they used to buy USD to keep their currencies down and real wages low.
(This culture of exports keeps the standard of living down but it does keep people working.)

With the new single currency, the ECB can’t (ideologically) buy USD to keep their real wages low. So now they are losing their export channel and need to sustain domestic demand to sustain employment. Lower interest rates don’t do that. ECB rate cuts won’t matter.

Just like Fed, rate cuts didn’t sustain US demand, and zero rates didn’t sustain demand in Japan. And fiscal balance in the eurozone is strictly at the national level, where deficits risk solvency. And their banks are at risk of insolvency as well, with deposit insurance also at the national level.

This is true systemic risk. Things can deteriorate very quickly, and the entire payments system shut down, if external demand is too low to sustain growth and employment.

Operationally the ‘solution’ is quite simple; the ECB or the Euro Parliament can write any size check they want (in euros) to support any size fiscal response they want. But legally (and ideologically) this can’t happen without a change in the treaty.

And add to this the fact that the ECB has been increasingly borrowing USD from the Fed to support its banking system that somehow has been caught short USD, probably due to making USD loans that they funded in USD. While this is relatively small (maybe $120 billion), it could snowball, and ultimately, at the macro level, it may wind down with euro agents selling euros to buy and repay the USD and trigger a currency collapse.

Right now it’s all going the wrong way in the eurozone.


SocGen, Barclays Say ECB to Cut Rates to 3.5%
German Import Price Inflation Holds at Fastest Pace Since 2000
European Central Banks Offer More Dollars From Fed
Consumer Prices Decline in Two German States, Increase in Hesse
French Consumer Confidence Rises on Oil Price Decline
ECB’s Gonzalez-Paramo Says Markets Still `in Middle’ of Crisis
One-Month Euro Borrowing Rate Climbs to 8-Year High, EBF Says
Sarkozy Pushes Back Deficit Reduction as Growth Slows
French Budget Deficit Wider Than Estimated, Woerth Says
Spanish Mortgage Lending Falls 29 Percent, 12th Monthly Decline
ECB’s Ordonez Says Spain Wage-Indexation Toxic
Euro-Area Economy Is at Standstill, Bank of Italy Index Shows
European Government Bonds Rise as U.S. Bank-Rescue Plan Stalls



(dpa) – The French economy contracted by 0.3 per cent in the second quarter of the year, the first quarter of negative GDP growth since 2002, the government’s statistical office INSEE announced on Friday.

The announcement could be the first of a series of bad news for France’s economy. French radio reported Friday that the unemployment figures to be made public on Monday will be the worst in 10 years, with up to 40,000 adults added to the jobless rolls in August.

On Thursday, in a speech on the current economic crisis, French President Nicolas Sarkozy said that the turmoil in the American finance sector would affect French economic growth, joblessness and purchasing power.

He also suggested that the country could be heading for a recession, which is defined as two consecutive quarters of negative economic growth.

According to INSEE, the economic contraction in the second quarter was due in part to the second consecutive decline in household spending and a 1.7 per cent fall in exports. dpa sm sc

[list of articles][end]

SocGen, Barclays Say ECB to Cut Rates to 3.5%

(Bloomberg) The European Central Bank will cut its benchmark interest rate to 3.5 percent next year as the financial market crisis deepens the economic slowdown and slows inflation, economists at Societe Generale SA and Barclay’s Capital said, revising earlier calls.

“A deeper corporate sector correction is now under way in Europe that will only be exacerbated by the financial turmoil,”

James Nixon, an economist at Societe Generale in London wrote in a note to clients. “Weaker growth and falling inflation will now finally open the door to a series of gradual interest-rate cuts.”

Business confidence in the euro area’s three largest economies fell this month more than economists forecast as financial turmoil in the U.S. imperiled growth around the world.

The ECB has so far said slowing growth isn’t enough to overcome concern that the fastest inflation in 16 years will become entrenched through a wage-price spiral.

Nixon forecasts three quarter-percent cuts in March, June and September, bringing the ECB key rate to 3.5 percent from 4.25 percent. He previously predicted rates would remain unchanged throughout 2009.

Barclays Capital’s chief European economist, Julian Callow, expects the bank to start cutting rates in December and then lower borrowing costs again in March and June.

Callow conceded that the first cut may be delayed as ECB policy makers await the outcome of Germany’s IG Metall wage round, raising the “risk of a 50 basis-points cut in March.”

[list of articles][end]

German Import Price Inflation Holds at Fastest Pace Since 2000

(Bloomberg) Import-price inflation in Germany, Europe’s largest economy, held at the fastest pace in almost eight years in August led by higher energy costs.

Prices rose 9.3 percent from a year earlier, the Federal Statistics Office in Wiesbaden said today, unchanged from July and the highest level since November 2000. Economists expected an increase of 9.1 percent, the median of 21 forecasts in a Bloomberg News survey showed. In the month, prices fell 0.8 percent, less than economists expected.

While the price of oil has retreated about a third from its July record, easing pressure on consumer and company purses, a barrel of crude is still over 30 percent more expensive than a year ago. The European Central Bank expects past oil price gains to result in pipeline pressures that could unleash an inflationary wage-price spiral. Policy makers say preventing these so-called second round-effects overrides any anxiety over faltering economic growth and the financial market crisis.

“While the price of oil may have dropped significantly from July, it’s still high and other commodities are slower to follow,” said Alexander Koch, an economist at UniCredit Markets and Investment in Munich. “There are still pipeline pressures that will keep the ECB on inflation alert until the end of the year.”

ECB Vice President Lucas Papademos said in an interview with Italy’s Il Sole 24 Ore published today that there are “clear indications” of faster wage increases and that the bank “cannot exclude renewed increases in oil and commodity prices.”

Rising Prices
German inflation probably slowed to 2.9 percent in August from 3.3 percent in the previous month, when measured using a harmonized European Union method, a Bloomberg survey shows. That’s still well above the ECB’s 2 percent limit. The Federal Statistics Office in Wiesbaden may publish September inflation data today.

Prices for gas rose 55.4 percent in the year and oil was 50.3 percent more expensive, today’s report showed. The cost of coal increased 84.3 percent from August 2007. Excluding energy, import prices rose 4.1 percent in the year.

Business confidence in the euro area’s three largest economies fell more this month than economists forecast as financial turmoil in the U.S. imperiled growth around the world, industry surveys showed yesterday. The economy of the 15 nations sharing the euro is already struggling to recover from a second- quarter contraction.

In the past two weeks, Lehman Brothers Holdings Inc. collapsed and the U.S. government took over American International Group Inc. The world’s biggest financial companies have posted more than $520 billion in writedowns and credit losses since the start of last year after record defaults on housing loans to consumers with poor credit histories, pushing up borrowing costs as banks became reluctant to lend to each other.

The ECB raised its key rate to a seven year-high of 4.25 percent in July after record oil prices pushed the inflation rate to the highest in 16 years. Annual price gains have decelerated, even if, at 3.8 percent, they are still almost twice the ECB’s 2 percent limit.

[list of articles][end]

European Central Banks Offer More Dollars From Fed

(Bloomberg) European central banks will for the first time let banks borrow dollars from them for a week in an effort to ease drum-tight money markets at the end of the quarter.

With the cost of borrowing dollars over three months yesterday jumping by the most since 1999, the European Central Bank, Bank of England and Swiss National Bank said today they will auction a total of $74 billion in one-week funding. The Federal Reserve assisted by providing the ECB and SNB with access to $13 billion more of its currency, boosting the amount of dollars it makes available to counterparts to $290 billion.

“These operations are designed to address funding pressures over quarter end,” the central banks said in statements.

“Central banks continue to work together closely and are prepared to take further steps as needed to address the ongoing pressure in funding markets.”

The central banks are tweaking the timeframes over which they auction dollars as banks remain reluctant to lend to each other even after the Fed more than quadrupled the amount of dollars that can be sold around the world. Concern a U.S. rescue plan to ease the worsening financial crisis won’t be implemented fast enough may strain markets again today.

“The money markets will remain tense until the U.S. package is agreed and starts to be implemented,” said Holger Schmieding, chief European economist at Bank of America Corp. in London.

Switch to Weekly
Having sold dollars for a day for the first time last week, the ECB will today offer $35 billion in funds for a week. It will reduce its sale of overnight dollars by $10 billion to $30 billion. The Swiss National Bank will auction $9 billion over seven days, while paring the amount it offers overnight to $7 billion from $10 billion.

The Bank of England, which has held six overnight dollar auctions for $40 billion, will now sell $30 billion for a week and $10 billion in overnight auctions. The U.K. bank will also hold weekly auctions for pounds against extended collateral including mortgage securities.

Central bankers are stepping in as a source of dollars as $522 billion in writedowns and losses tied to the U.S. mortgage market and questions about the credit-worth of counterparties prompt bankers to hoard cash to meet their own funding needs.

Banks in the euro region deposited more than 1 billion euros with the ECB for a sixth day running yesterday, the longest such stretch since the introduction of the euro in 1999.

Swap Lines
The Fed is providing counterparts with dollars through so- called swap lines, enabling them to auction the U.S. currency in their own markets in return for collateral. It last week extended links established in December with the ECB and Swiss National Bank by $70 billion, and created $110 billion in new facilities with central banks in Japan, the U.K. and Canada. Yesterday, it agreed to channel $30 billion to Norway, Sweden, Denmark and Australia.

The financial crisis, which deepened this month after Lehman Brothers Holdings Inc. filed for bankruptcy and the U.S. government took over American International Group Inc., is entering a new stage as lawmakers squabble over a $700 billion rescue of the U.S. banking system. Negotiations stalled yesterday after Republicans in the U.S. House of Representatives undercut the Bush administration and left it to congressional leaders to hammer out a compromise.

Concern the plan may be diluted yesterday spurred money- market rates around the world. The three-month London interbank offered rate, or Libor, that most banks charge each other for dollar loans rose 29 basis points to 3.77 percent.

[list of articles][end]

Consumer Prices Decline in Two German States, Increase in Hesse

(Bloomberg) Consumer prices in two German states eased in September as the cost of food and package vacations declined. Prices rose in the state of Hesse.

Prices in Brandenburg and Saxony fell 0.1 percent from August, the state statistics offices in Kamenz and Potsdam said today. In the year, prices gained 2.8 percent in Brandenburg and 3 percent in Saxony. In Hesse, consumer prices rose 0.1 percent from August and 3.3 percent in the year.

While the cost of oil has fallen from a July record it’s still 30 percent higher than a year ago. The European Central Bank expects past gains in food and commodity prices could still unleash an inflationary wage-price spiral. ECB President Jean- Claude Trichet said on Sept. 11 that inflation is the main worry of European citizens.

“Energy prices still drive inflation in Germany,” said Matthias Rubisch, an economist at Commerzbank AG in Frankfurt.

“The ECB will remain concerned as inflation will recede only slightly in the coming months.”

Economists expect German inflation to slow to 2.9 percent in September from 3.3 percent using a harmonized European Union method, the median of 15 forecasts in a Bloomberg News survey shows. The Federal Statistics Office in Wiesbaden is scheduled to report pan-German inflation figures later today.

Energy prices in Brandenburg rose 0.6 percent from the previous month while prices for package vacations fell 7 percent and costs for holiday accommodation decreased 27.4 percent.

Seasonal food prices dropped 2.5 percent. In Hesse, food prices fell 0.3 percent from August while household energy costs rose 1.4 percent in the month and 13.3 percent in the year.

Import Price Pressure
Import-price inflation in Germany, Europe’s largest economy, held at the fastest pace in almost eight years in August led by higher energy costs, the Federal Statistics Office in Wiesbaden said today. Excluding energy, import prices rose 4.1 percent in the year.

ECB Vice President Lucas Papademos said in an interview with Italy’s Il Sole 24 Ore published today that there are “clear indications” of faster wage increases and that the bank “cannot exclude renewed increases” in oil and commodity prices. “The outlook for inflation over the medium term will fundamentally depend on future unit labor cost growth.”

Germany’s IG Metall labor union, representing 3.2 million workers, is seeking the biggest pay increase in 16 years for staff at companies such as ThyssenKrupp AG and Siemens AG. The union, Germany’s biggest, wants wages to rise 8 percent next year, Chairman Berthold Huber said this week.

[list of articles][end]

French Consumer Confidence Rises on Oil Price Decline

(Bloomberg) French consumer confidence unexpectedly rose for the first time in more than a year in September after falling fuel prices left people with more to spend on food and clothing.

A gauge of consumer sentiment rose to minus 44 from a revised record-low minus 47 in July, the last month reported, the Paris- based national statistics office, Insee, said in a statement today. Economists expected a reading of minus 47, according to the median of 20 forecasts in a Bloomberg News survey.

The price of oil has fallen by almost a third from its record in July. Still, crude remains at more than $100 a barrel and is 33 percent higher than a year ago. At the same time, a deepening crisis in global financial markets may dim consumers’ willingness to spend in coming months.

“Whether it’s consumption, investment or exports, all the engines of French growth are stopped, or even in reverse,” said Marc Touati, chief economist at Global Equities in Paris, before the report.

Earlier this month, Finance Minister Christine Lagarde pared her prediction for 2008 economic growth to around 1 percent from a previous forecast of at least 1.7 percent. Those forecasts may prove optimistic as the worst U.S. housing slump since the Great Depression has pushed up the cost of credit globally and roiled financial markets, threatening to further pare global growth.

Growth Declines
The French economy shrank 0.3 percent in the second quarter, the first contractions in more than five years, a separate report confirmed today. Household spending fell 0.1 percent, while exports declined 1.7 percent, from an increase of 2.6 percent in the first three months. The European Commission predicted Sept. 10 that the economy will stall in the third quarter, barely skirting a recession.

“It’s possible France’s GDP will shrink in the third quarter; even zero growth would be good,” Frederik Ducrozet, an economist at Credit Agricole SA in Paris, said on Bloomberg Television.

The gain in French confidence mirrored advances in Germany and Italy as the lower oil prices fueled optimism that record inflation rates would ease. Confidence among consumers in Germany, Europe’s biggest economy, unexpectedly rose for the first time in five months, a report showed yesterday. Italian confidence advanced from a 15-year low in August.

Manufacturers were less optimistic. Confidence among French producers dropped to a five-year low in September, Insee said on Sept. 24, suggesting that the turmoil in markets fueled by the collapse of Lehman Brothers Holdings Inc. has overshadowed declines in oil and the dollar. Crude has fallen 27 percent decline since a July 11 record of $147.27 and the euro also declined from a peak against the dollar the same month.

French President Nicolas Sarkozy said in a speech on the economy yesterday that the turmoil in financial markets will be lasting and the fallout will hurt growth, employment and spending.

[list of articles][end]

ECB’s Gonzalez-Paramo Says Markets Still `in Middle’ of Crisis

(Bloomberg) European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo comments on the global financial market turmoil. He spoke today at a conference in Chicago.

“I would have much preferred to be here under somewhat different circumstances. The international financial system has reached a crossroad. Large financial institutions have failed or have to be taken over by others. Major bank models have been put into question. Important markets exhibit high volatility and low liquidity. Together with other economic developments, the financial turmoil has significantly increased the uncertainty surrounding the outlook for growth and inflation in the short- and medium-term both in the euro area and in the U.S.”

“We still seem to be in the middle of” the financial turmoil.

[list of articles][end]

One-Month Euro Borrowing Rate Climbs to 8-Year High, EBF Says

(Bloomberg) The cost of borrowing in euros for one month rose to the highest level since December 2000, according to the European Banking Federation.

The euro interbank offered rate, or Euribor, climbed 3 basis points to 5.01 percent, EBF figures show today. It was at 4.63 percent a week ago. The three-month rate increased 2 basis points to 5.14 percent, the highest level since the introduction of the euro in 1999.

[list of articles][end]

Sarkozy Pushes Back Deficit Reduction as Growth Slows

(Bloomberg) French President Nicolas Sarkozy, facing the slowest economic expansion in at least five years, shelved deficit-reduction plans in his second budget released today.

The budget is based on a growth forecast for this year and next of 1 percent, less than half the 2007 pace, which will leave the government with less revenue and higher welfare costs. To keep the shortfall under the European Union limit, France may cap spending, not replace half of retiring civil servants, and raise taxes to fund incentives for the unemployed to return to work.

“It’s easy to explain: tax receipts are shrinking,” Budget Minister Eric Woerth said today on RTL radio. “Less growth means less fiscal revenue.” He cited the higher cost of debt and high inflation as other factors pushing up the deficit.

Sarkozy’s 8 billion euros ($11.7 billion) of tax cuts this year were not enough to buoy growth as surging commodities prices fanned inflation and global demand cooled amid a year-long credit crisis. The euro region’s second-largest economy contracted and shed jobs in the second quarter, sending consumer confidence to a record low and curbing spending.

Deficit Widening
The new budget plan forecasts the deficit will hold at last year’s level of 2.7 percent of gross domestic product this year and next, remaining below the EU threshold of 3 percent. The government initially planned to narrow the shortfall to 2.5 percent this year and 2 percent next year.

“If there’s one European country in a problematic situation regarding the 3 percent, it’s France,” said Natacha Valla, an economist at Goldman Sachs Group Inc. in Paris.

The higher deficit and slower growth will force an increase in borrowing. The government plans to sell $135 billion euros of bonds and notes next year, up from $116.5 billion euros worth this year. Total debt will rise to 66 percent of GDP from 65.3 percent this year.

The budget plan is based on the assumption that the cost of oil will average $100 a barrel in 2009 and the euro will be worth on average $1.45. Crude oil reached a peak of $147.27 in July and the euro hit a record $1.6038 in the same month.

Sarkozy, who’s been in office since May 2007, has faced growing popular discontent as gasoline and food prices rose.

Sixty-two percent of those surveyed by BVA polling company this month found his economic policy “bad” or “very bad.”

Public Support
“The reason why Sarkozy was elected president is that he’d promised to deliver on economic and social issues at a time of pessimism,” said Gael Sliman, deputy director at BVA. Now “the bad economic news condemn him to be unpopular during all the difficult period of 2008 and part of 2009.”

Sarkozy yesterday said he wouldn’t impose austerity policies as the turmoil in financial markets hurts economic growth, job creation and household purchasing power.

“If activity were to strongly and lastingly recede, I wouldn’t hesitate to take necessary steps to underpin it,” the French president said in a speech in Toulon, France. “Telling the truth to the French is saying that the crisis isn’t over, its consequences will be lasting.”

Sarkozy’s political opposition, said he was using the world economic crisis to divert attention from his policy failures.

`Using’ the Crisis
“The president is using the crisis as an excuse to justify the acceleration of an austerity policy towards the middle class” and the least well off, Michel Sapin a former Socialist Finance Minister, said in a statement.

The government has little leeway to act, especially with France holding the rotating EU presidency. Two weeks ago, Finance Minister Christine Lagarde and her European counterparts pledged to pursue financial discipline. European Central Bank President Jean-Claude Trichet called for them to deliver on their promise.

Woerth said today that government has reined in spending.

“It’s going to be a status-quo budget,” said Laurence Boone, an economist at Barclays Capital in Paris. “They have no room for maneuver if they want to stay within the EU limits” of a deficit of less than 3 percent of gross domestic product.

The tax cuts announced by Sarkozy last year, including a mortgage-interest deduction, the elimination of most inheritance levies and a wealth-tax rebate for people investing in small companies will extend into next year. They also include the elimination of most taxes on overtime hours, which may not be as effective because of the slowdown, Barclays’ Boone said.

Legislative Victories
Sarkozy won a string of legislative victories before the summer recess. Lawmakers in recent past months passed measures proposed by the government to boost retail competition, toughen jobseekers’ benefit rules and increase work hours.

“Structural reforms have been launched,” Goldman’s Valla said. “What the economy needs are very precise and fast spending measures, but France doesn’t have the means to do it.”

The president has promised to eliminate a tax on companies’ sales. At the same time, he is planning new levies on private health and retirement insurers and on corporate profits distributed to employees as part of a plan to erase the health- care system deficit by 2011.

He also said last month he will impose a new capital-gains tax to fund incentives for the unemployed to go back to work, a measure backed by 65 percent of French people, the BVA poll showed.

According to Medef, France’s biggest business lobby, overall levies on companies are going to rise “slightly” in 2008 and “strongly” next year.

[list of articles][end]

French Budget Deficit Wider Than Estimated, Woerth Says

(Bloomberg) France’s budget gap this year will be wider than estimated, Budget Minister Eric Woerth said, adding that he sees the deficit in 2009 at 2.7 percent of gross domestic product.

Woerth said the deficit will rise to about 49 billion euros ($72 billion) this year, up from a 41.4 billion-euro initial forecast. He said 2009′s deficit will widen to 52 billion euros.

“It’s easy to explain,” he said. “Tax receipts are shrinking. Less growth means less fiscal revenue.”

He cited the higher cost of debt and rising inflation among other reasons for the widening French deficit.

Woerth said France will not drop the government goal of balancing its budget in 2012.

“It is not out of reach,” he said.

[list of articles][end]

Spanish Mortgage Lending Falls 29 Percent, 12th Monthly Decline

(Bloomberg) Mortgage lending in Spain fell for the 12th month in July as the collapse of a decade-long housing boom pushed the Spanish economy toward recession.

Mortgage lending, in terms of the amount of money disbursed, fell 29 percent from a year earlier, and the number of mortgages issued for homes declined 29 percent, the Madrid-based National Statistics Institute said in an e-mailed statement today. In June mortgage lending fell 37 percent from a year earlier.

The housing boom helped Spain grow faster than the euro- region for more than a decade. The global credit crunch has increased borrowing costs and contributed to pushing construction and real estate companies into bankruptcy, and Spain is now expected to follow Ireland into a recession, according to the European Commission.

Housing transactions fell 26 percent from a year earlier, the institute said.

[list of articles][end]

ECB’s Ordonez Says Spain Wage-Indexation Toxic

(Bloomberg) European Central Bank Governing Council member Miguel Angel Fernandez Ordonez comments on Spanish wage-indexation and the ECB’s inflation-fighting policy. He spoke in Seville, Spain, today.

On Spanish wage-indexation:
“Clauses linking pay settlements to inflation in collective- bargaining agreements are especially toxic when inflation has increased due to external shocks.

“It’s not surprising that the unemployment rate has increased in the past year.

“It’s much more important than in the past to activate all mechanisms that can allow agents to limit cost increases and improve productivity gains.

“Until now, employment has been the main variable that adjusts at times of crisis.

“Unemployment has seen an intense increase.

“The most important thing is not to give in to the temptation of adopting policies that try to avoid the adjustment.”

“The damage of unemployment is much worse” than a salary decline.

On Spanish inflation:
“Inflation will probably be much closer to the euro-region average in 2009 and 2010.”

On the ECB’s inflation-fighting credentials:
“It’s essential that the European Central Bank is fully focused on the objective it been set to maintain inflation at a very moderate pace and in this respect I think the ECB is fully fulfilling its mission.

“There is full confidence that the ECB will return inflation to its objective, and that is helping to mitigate somewhat the current uncertainties regarding the financial system, economic growth and other variables.”

On money-market interest rates:
“It’s difficult to predict if this tightening will keep increasing, though clearly interest rates in money markets, the fundamental reference for Spanish mortgages, already include a substantial risk premium over the ECB’s official interest rates.”

On the global economy:
“Unlike a few months ago, no one is defending the possibility of decoupling now.”

The effects of the crisis “have touched everyone.”

On U.S. rescue plan:
“We should be grateful that with the money of U.S. taxpayers they improve the international financial situation.”

On how the European banking sector compares to U.S.:
“So far, the situation in the European banking system isn’t the same, except one country outside the euro region that is facing considerable problems.”

On Spanish real estate:
“We have a problem in real estate, but it is far from what is being seen in the U.S.”

“U.S. subprime has 16 percent default rates. We haven’t seen that in the worst moments of crisis.”

On Spanish banks:
“If construction is going to be reduced then the Spanish financial system has to adjust to the new situation.”

“What they have in front of them is a complicated task.”

[list of articles][end]

Euro-Area Economy Is at Standstill, Bank of Italy Index Shows

(Bloomberg) The European economy has stalled, an index co-produced by the Bank of Italy showed.

The EuroCoin index measuring economic expansion fell this month to a record low of 0.04 from 0.17 in August, the London- based Center for Economic Policy Research said in a report today.

“The most recent figure was negatively affected by the sharp fall of firms’ confidence and the recent financial markets retreat,” the report said.

The economy of the 15 nations that share the euro contracted in the second quarter for the first time since the single currency was introduced in 1999.

[list of articles][end]

European Government Bonds Rise as U.S. Bank-Rescue Plan Stalls

(Bloomberg) European government bonds rose, with yields on two-year notes headed for the biggest weekly decline in eight months, as investors sought the safest assets after negotiations on a U.S. financial-rescue plan stalled.

Investors piled into short-dated debt as lawmakers in the U.S. prepared to meet for a second day after talks yesterday ended without an agreement. A group of House Republicans led by Eric Cantor of Virginia said they wouldn’t back a plan based on the approach outlined by Treasury Secretary Henry Paulson and supported by President George W. Bush and Democratic leaders.

Washington Mutual Inc. was taken over by JPMorgan Chase & Co., in the biggest U.S. bank failure in history.

“The market is reminded once again that this is not a simple piece of legislation,” Luca Jellinek, a London-based strategist at Royal Bank of Scotland Group Plc, wrote in a note today. “The news is uniformly friendly” to the bond market.

The yield on the two-year note dropped 9 basis points to 3.75 percent as of 10:25 a.m. in London. The 4 percent note due September 2010 rose 0.17, or 1.7 euros per 1,000-euro ($1,458) face amount, to 100.46. Were the note to close at that level, it would be the biggest weekly decline in the yield since the five days ended Feb. 8.

The yield on the 10-year German bund, the euro region’s benchmark government-debt security, fell 3 basis points to 4.20 percent. Yields move inversely to bond prices.

The gains pushed the difference in yield, or spread, between two- and 10-year notes to the widest in five months as investors raised bets the financial crisis in the U.S. will crimp economic growth in Europe.

Outperform Treasuries
European bonds have outperformed U.S. Treasuries this quarter as the bailout plan fuelled speculation that it will add to the U.S. government’s fiscal burden. Bonds in the euro region handed investors a 2.97 percent return since the end of June, compared with 1.91 percent from their U.S. counterparts, according to Merrill Lynch & Co.’s EMU Direct and Treasury Master indexes.

Demand for government bonds was also boosted as stocks declined and the cost of protecting European corporate bonds from default rose. The Dow Jones Stoxx 600 Index fell 1.3 percent. Contracts on the Markit iTraxx Crossover Index of 50 companies with mostly high-risk, high-yield credit ratings increased 15 basis points to 590, according to JPMorgan Chase & Co., indicating a deterioration in the perception of credit quality.

The European Central Bank, Swiss National Bank and Bank of England said today they will auction a combined $74 billion in one-week funding to counter the seizure in money markets. The Federal Reserve assisted by providing the ECB and SNB with access to $13 billion more of its currency, boosting the amount of dollars it makes available to counterparts to $290 billion.

Money-market interest rates around the world soared yesterday on concern that Paulson’s plan will be diluted as it makes its way through Congress, causing banks to hoard cash. The three-month London interbank offered rate, or Libor, that banks charge each other for dollar loans jumped by the most since 1999 and the euro rate rose to the highest level since November 2000.


Posted in EU | No Comments »

2008-09-26 USER

Posted by WARREN MOSLER on 26th September 2008

[Skip to the end]

GDP QoQ Annualized (2Q F)

Survey 3.3%
Actual 2.8%
Prior 3.3%
Revised n/a

Growth lower than expected, but still ok.


GDP YoY Annualized Real (2Q F)

Survey n/a
Actual 2.0%
Prior 2.1%
Revised n/a

Still above recession levels, but still not looking that healthy.


GDP YoY Annualized Nominal (2Q F)

Survey n/a
Actual 4.1%
Prior 4.7%
Revised n/a

Nominal GDP falling, but not yet to previous recession levels.


GDP Price Index (2Q F)

Survey 1.2%
Actual 1.1%
Prior 1.2%
Revised n/a

A little better than expected, but this series doen’t carry much weight.




Core PCE QoQ (2Q F)

Survey 2.1%
Actual 2.2%
Prior 2.1%
Revised n/a

A bit higher than expected, and the Fed does watch this one closely. They want it under 2%.


Personal Consumption (2Q F)

Survey 1.7%
Actual 1.2%
Prior 1.7%
Revised n/a

Worse than expected and not moving much off the bottom, which are at recession type levels.


Personal Consumption ALLX 1 (2Q F)


Personal Consumption ALLX 2 (2Q F)


Univ. of Michigan Confidence (Sep F)

Survey 70.8
Actual 70.3
Prior 73.1
Revised n/a

Less than expected but looks to have perked up some.


1 Year Inflation Expectations (Sep F)

Survey n/a
Actual 4.3%
Prior 3.6%
Revised n/a

Welcome news for the Fed. Follows gasoline prices pretty closely.


5 Year Inflation Expectations (Sep F)

Survey n/a
Actual 3.0%
Prior 2.9%
Revised n/a

Also nice to see that coming down.


Univ. of Michigan TABLE Inflation Expectations (Sep F)


Posted in Daily | No Comments »

Bloomberg: California Home Prices Drop Record 41% in August Amid Defaults

Posted by Sada Mosler on 25th September 2008

[Skip to the end]

Wrong headline, should be ‘California sales turn the corner!’

California Existing Home Sales

California Home Prices Drop Record 41% in August Amid Defaults

by Dan Levy

Sept. 25 (Bloomberg) California home prices tumbled a record 41 percent in August from a year earlier as foreclosure sales pushed down values in the biggest U.S. state.

The median price of an existing, single-family detached home fell to $350,140 and will likely fall further, the Los Angeles-based California Association of Realtors said today in a report. Sales increased 56.7 percent from August 2007 [typo - supposed to be 2008] and 1.8 percent from July.

“While sales appear to have turned the corner,
the median will experience additional downward pressure as we move into the off-peak season in the coming months, and will continue to face pressure from distressed sales,” Leslie Appleton-Young, vice president and chief economist of the association, said in a statement.

More than 101,000 California households received a default notice, were warned of a pending auction or foreclosed on last month, RealtyTrac Inc., a seller of default data, said on Sept. 12. That was a third of the nation’s total and represented one in 130 homes in the state.

Eight of the 10 metropolitan areas with the highest foreclosure rates are in California, led by Stockton in first place, according to RealtyTrac. Merced, Modesto, Vallejo-Fairfield and Riverside-San Bernardino ranked second through fifth. Bakersfield, Salinas-Monterey and Sacramento ranked eighth through tenth.


Posted in Housing | 2 Comments »

Bloomberg: Euro refineries to shut for repairs

Posted by Sada Mosler on 25th September 2008

[Skip to the end]

This happens when margins get too low: cheaper to shut for repairs than to operate at a loss.

Saudi output should fall a bid due to lack of demand, but crude prices should hold at their levels.

Gasoline prices should increase vs crude prices (crack spreads widen).

Shell, BP to Shut Refineries for Repair, Cut Europe Fuel Supply

by Nidaa Bakhsh

Sept. 25 (Bloomberg) Royal Dutch Shell Plc, BP Plc and Total SA are leading oil companies that will shut at least 6 percent of Europe’s refining for repairs next month, reducing inventories already diminished by U.S. demand after Hurricane Ike.

The outages from Rotterdam to Italy will idle at least 952,000 barrels of crude oil distillation a day in October, double the September figure, according to data compiled by Bloomberg. The total includes plants owned by Shell and BP in the Netherlands, representing a combined 400,000 barrels a day.

Refinery profits in western Europe fell to their lowest level since at least 2004 this year as record prices cut fuel demand. Gasoline inventories fell 18 percent to 612,000 metric tons in the Amsterdam-Rotterdam-Antwerp region last week, according to Dutch consultant PJK International BV, because of rising exports to the U.S. after Hurricane Ike shut Gulf Coast refineries.


Posted in Articles, Oil | No Comments »

Bloomberg: Bank run in HK

Posted by Sada Mosler on 25th September 2008

[Skip to the end]

This happens all the time with fixed exchange rates and currency boards.

The only way for banks to get ‘real’ (convertible) $HK for their depositors is to buy them from the monetary authority with $US. That usually means banks have to borrow $US to meet withdrawals of $HK, and most banks won’t have $US lines of more than a relatively small percentage of their deposits. With a strict currency board arrangement the monetary authority isn’t allowed to lend (convertible) $HK or its $US reserves, though in HK they sometimes do. But even those reserves are finite, and way smaller than total bank liabilities.

Historically the result has been a deflationary mess, with GDP dropping double digits, high unemployment, bank failures, and collapsing property and other asset prices.

At the macro level, the only way the island can get the $US it needs to buy $HK from the monetary authority is to net export (or sell assets for $US). The value of the $HK can’t go down (the monetary authority has more than enough $US reserves to buy back all the real $HK it’s sold), so the way costs of production go down is via local deflation due to the collapse in aggregate demand until prices are low enough to drive the needed exports.

Hopefully nothing comes of it this time around. But it hasn’t been that kind of year…

Hong Kong Savers Fret as Bank East Asia Fights Rumors

by Kelvin Wong and Theresa Tang

Sept. 25 (Bloomberg) For the first time since the Asian financial crisis more than a decade ago, Hong Kong has faced a bank run.

Hundreds of depositors lined up at the city’s third-largest lender Bank of East Asia Ltd. yesterday as the bank hit out at “malicious rumors,” and Chairman David Li rushed back to Hong Kong from the U.S. to reassure clients and investors. The city’s central bank jumped to BEA’s defense and police said they’re investigating phone text messages questioning its health.


Posted in Articles, Asia, Currencies, Hong Kong | No Comments »

2008-09-25 USER

Posted by WARREN MOSLER on 25th September 2008

[Skip to the end]

Durable Goods Orders MoM (Aug)

Survey -1.9%
Actual -4.5%
Prior 1.3%
Revised 0.8%

A very volatile series

Way lower than expected, and prior revised down as well.


Durable Goods Orders YoY (Aug)

Survey n/a
Actual -8.1%
Prior -2.2%
Revised n/a

Continuing its downward drift that started about a year ago.


Durables Ex Transportation MoM (Aug)

Survey -0.5%
Actual -3.0%
Prior 0.7%
Revised 0.1%

It wasn’t all transportation. This is also lower than expected, and the prior month revised lower.


Durables Ex Defense MoM (Aug)

Survey n/a
Actual -5.0%
Prior 1.9%
Revised n/a

The jump in defense kept the total from being even worse.


Durable Goods ALLX (Aug)

Consumer goods and defense, the only bright (modest) spots.


Initial Jobless Claims (Sep 20)

Survey 450K
Actual 493K
Prior 455K
Revised 461K

A large spike up. Government estimated 50,000 due to the hurricanes; so, it would have been 430,000. This will take a few weeks to sort out.


Continuing Jobless Claims (Sep 13)

Survey 3510K
Actual 3542K
Prior 3478K
Revised 3479K

This just keeps going up towards recession levels. No telling how much extended benefits has added, both now and in the last recession.


Jobless Claims ALLX (Sep 20)


New Home Sales (Aug)

Survey 510K
Actual 460K
Prior 515K
Revised 520K

Lower than expected, and last month revised up as suspected. They’ve been revising previous months up for a while.

There may be a problem with availability of desirable homes, as starts are down by 1 million per year, and inventories are down as well.


New Home Sales- Total For Sale (Aug)

Survey n/a
Actual 408.00
Prior 427.00
Revised n/a

This continues to fall rapidly and should lead to a shortage in the next few months.


New Home Sales MoM (Aug)

Survey -1.0%
Actual -11.5%
Prior 2.4%
Revised 4.0%

Lower than expected and prior month revised up.


New Home Sales YoY (Aug)

Survey n/a
Actual -34.5%
Prior -34.7%
Revised n/a

Down a lot but signs of bottoming.


New Home Sales Median Price (Aug)

Survey n/a
Actual 221.90K
Prior 234.90K
Revised n/a

Still drifting lower but so far not collapsing.


New Home Sales TABLE 1 (Aug)

Something happened in the west.


New Home Sales TABLE 2 (Aug)

Karim writes:

  • Quite weak data that is leading to downward revisions to Q3 and Q4 GDP estimates. Q3 revisions about -½% that I have seen, some GDP estimates now coming in below 1%.

  • The shipments data is more highly correlated to current quarter growth.
  • -3.5% m/m headline, -2.1% ex-transport, -3.6% ex-defense.
  • Orders data more problematic for Q4.
  • -4.5% m/m headline, -3% ex-transport, -5% ex-defense.
  • Fairly broad-based weakness across sectors as well.

  • Capex had been holding up fairly well this year, but now looks as if retrenching; with private consumption likely to be weak and Bernanke signaling an export slowdown, not too many pillars of support left for the economy. Look for more fiscal stimulus and rate cuts.


Posted in Daily | 2 Comments »

Bloomberg: China Halts Interbank Lending With US, China Morning Post…

Posted by Sada Mosler on 24th September 2008

[Skip to the end]

This may actually help bring LIBOR down as the US banks don’t need USD funds from China while the rest of the world does.

China Halts Interbank Lending With U.S., Morning Post Says

By Joost Akkermans

Sept. 25 (Bloomberg) China’s banking regulator told domestic banks to halt lending to U.S. financial institutions in the interbank market to help prevent possible losses, the South China Morning Post reported, citing people it didn’t identify.

The ban imposed by the China Banking Regulatory Commission is for interbank lending of all currencies to U.S. banks, though not to banks from other countries, the English-language Hong Kong newspaper said today.

The decree came after the regulator obtained data about the risk of local banks to bonds issued by Lehman Brothers Holdings Inc., according to the newspaper. The CBRC wasn’t available for comment yesterday, the Morning Post reported.


Posted in Banking, CBs, China | 5 Comments »