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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 October, 2008

Re: Banks cutting foreign currency loans in Eastern Europe

Posted by WARREN MOSLER on 31st October 2008

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(email exchange)


>   On Fri, Oct 31, 2008 at 7:25 AM, Bob wrote:

`Panic’ Strikes East Europe Borrowers as Banks Cut Franc Loans

By Ben Holland, Laura Cochrane and Balazs Penz

Oct. 31 (Bloomberg)- Imre Apostagi says the hospital upgrade he’s overseeing has stalled because his employer in Budapest can’t get a foreign-currency loan.

The company borrows in foreign currencies to avoid domestic interest rates as much as double those linked to dollars, euros and Swiss francs. Now banks are curtailing the loans as investors pull money out of eastern Europe’s developing markets and local currencies plunge.

Foreign-denominated loans helped fuel eastern European economies including Poland, Romania and Ukraine, funding home purchases and entrepreneurship after the region emerged from communism. The elimination of such lending is magnifying the global credit crunch and threatening to stall the expansion of some of Europe’s fastest-growing economies.

Plunging Currencies

Since the end of August, the forint has fallen 16 percent against the Swiss franc, the currency of choice for Hungarian homebuyers, and more than 8 percent versus the euro. Foreign- currency loans make up 62 percent of all household debt in the country, up from 33 percent three years ago.

That’s even after a boost this week from an International Monetary Fund emergency loan program for emerging markets and the U.S. Federal Reserve’s decision to pump as much as $120 billion into Brazil, Mexico, South Korea and Singapore. The Fed said yesterday that it aims to “mitigate the spread of difficulties in obtaining U.S. dollar funding.”

Plunging domestic currencies mean higher monthly payments for businesses and households repaying foreign-denominated loans, forcing them to scale back spending.

No More Dreaming

The bulk of eastern Europe’s credit boom was denominated in foreign currencies because they provided for cheaper financing.

Before the current financial turmoil, Romanian banks typically charged 7 percent interest on a euro loan, compared with about 9.5 percent for those in leu. Romanians had about $36 billion of foreign-currency loans at the end of September, almost triple the figure two years earlier.

In Hungary, rates on Swiss franc loans were about half the forint rates. Consumers borrowed five times as much in foreign currencies as in forint in the three months through June.

‘Serious Problems’

Now banks including Munich-based Bayerische Landesbank and Austria’s Raiffeisen International Bank Holding AG are curbing foreign-currency loans in Hungary. In Poland, where 80 percent of mortgages are denominated in Swiss francs, Bank Millennium SA, Getin Bank SA and PKO Bank Polski SA have either boosted fees or stopped lending in the currency.

The east has been the fastest-growing part of Europe, with Romania’s economy expanding 9.3 percent in the year through June, Ukraine 6.5 percent and Poland 5.8 percent. The combined economy of the countries sharing the euro grew 1.4 percent in the period.

IMF Help

Ukraine, facing financial meltdown as the hryvnia drops and prices for exports such as steel tumble, on Oct. 26 agreed to a $16.5 billion loan from the IMF.

Hungary on Oct. 28 secured $26 billion in loans from the IMF, the EU and the World Bank. The government forecast a 1 percent economic contraction next year, the first since 1993.

These come with ‘conditions’ which means contractionary fiscal adjustments.

Panicked Customers

Romanian central bank Governor Mugur Isarescu sounded the alarm in June, saying the growth of foreign-currency loans was “excessively high and risky,” especially because Romanians with their communist past aren’t used to the discipline of debt.

`Cheaper, Riskier’

Turkish savings in foreign currencies exceeded loans by about 30 percent as of the end of 2007, according to a January Fitch report. In Poland foreign exchange loans were double deposits, and in Hungary they were triple.

“We’ve been observing a return to a good old banking rule to lend in a currency in which people earn,” said Jan Krzysztof Bielecki, chief executive officer of Poland’s biggest lender, Bank Pekao SA. It stopped non-zloty lending in 2003. “Earlier, banks competed on the Swiss franc market watching only sales levels and not looking at keeping an acceptable risk level.”


Posted in Articles, ECB | 10 Comments »

2008-10-31 USER

Posted by WARREN MOSLER on 31st October 2008

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Personal Income MoM (Sep)

Survey 0.1%
Actual 0.2%
Prior 0.5%
Revised 0.4%

A tick better than expected but last month revised down same.


Personal Income YoY (Sep)

Survey n/a
Actual 3.9%
Prior 4.3%
Revised n/a

Looks to be on the decline as expected.

Lower interest rates are also a drag on income, as households are net savers.


Personal Income ALLX (Sep)


Personal Consumption MoM (Sep)

Survey -0.2%
Actual -0.3%
Prior 0.0%
Revised n/a

Worse than expected and took dive as the publicity around the credit crisis petrified businesses and consumers.


Personal Consumption YoY (Sep)

Survey n/a
Actual 3.8%
Prior 4.5%
Revised n/a

Heading south but still growing some.


PCE Deflator YoY (Sep)

Survey 4.1%
Actual 4.2%
Prior 4.5%
Revised n/a

Higher than expected and staying high even with commodities coming down.


PCE Core MoM (Sep)

Survey 0.1%
Actual 0.2%
Prior 0.2%
Revised n/a

Higher than expected.


PCE Core YoY (Sep)

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

Holding firm, at least for now.


Employment Cost Index (3Q)

Survey 0.7%
Actual 0.7%
Prior 0.7%
Revised n/a

Well contained.


Employment Cost Index ALLX (3Q)

The surveys have a large subjective component, and have all taken dives recently.


RPX Composite 28dy YoY (Aug)

Survey n/a
Actual -17.96%
Prior -17.76%
Revised n/a


RPX Composite 28dy Index (Aug)

Survey n/a
Actual 219.67
Prior 224.28
Revised n/a


Chicago Purchasing Manager (Oct)

Survey 48.0
Actual 37.8
Prior 56.7
Revised n/a


NAPM Milwaukee (Oct)

Survey n/a
Actual 42.0
Prior 46.0
Revised n/a


Posted in Daily | No Comments »

Fed macro policy

Posted by WARREN MOSLER on 30th October 2008

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(email exchange)

>   On Wed, Oct 29, 2008 at 11:45 PM, Morris wrote:
>   This is the 64,000 dollar question…will unlimited FED lending to ENTIRE
>   world-with IMF help-created recovery? Push on string? Hyper inflation?
>   Question of the day…would love others inputs.

I’d say yes, it’s inflationary and the channels at least as follows:

1. The outstanding international dollar debt was an expansionary force when it was growing, to the extent the USD borrowings were spent. Some of that USD spending was overseas, some in the US.

Growing debt, if directed towards spending, is expansionary.

For example, you may borrow to build a house, or buy a new car.

But if you borrow to fund financial assets, your pension fund, or to buy mortgage backed securities, for example, it’s merely the rearranging of financial assets.

This increased ‘leverage’ and has no direct effect on demand, beyond the demand created by the financial institutions themselves. This includes all the hiring of employees for the financial sector which all counts as GDP.

(While this may not be deemed ‘useful output’ it is accounted for as GDP, like bridges to nowhere, and does function to support people’s livelihood. Yes, better to have employed them doing something deemed useful, but that’s another story)

2. Should the USD loans default, the financial institutions lose capital, meaning the shareholders (and bondholders, depending on the size of the loss) lose their nominal wealth. This may or may not reduce spending. Most studies say it’s a weak effect at best.

And for each institution to continue to function it needs to replace capital.

(In our ‘loans create deposits’ world, infinite capital is available at the right price, if the government has a policy to sustain domestic demand.)

For US institutions with USD denominated capital, losses result in a reduction of their USD capital.

Their liabilities remain the same, but their assets fall.

And any assets sold to reduce USD funding needs are sold for USD.

3. Institutions with capital denominated in other currencies, go through the same fundamental process but with another ‘step.’

When their USD assets are impaired, they are left with their USD liabilities.

They now have a ‘mismatch’ as non dollar assets including non dollar capital are supporting the remaining USD liabilities.

To get back to having their assets and liabilities matched in the same currency, they need to sell their assets in exchange for USD.

Until they do that they are ‘short’ USD vs their local currency, as a rising USD would mean they need to sell more of their local currency assets to cover their USD losses.

Technically, when the assets they need to sell to cover USD losses are denominated in non dollar currencies, this involves an FX transaction- selling local currency to buy USD- which puts downward pressure on their currencies.

Additionally, they need to continue to fund their USD financial assets, which can become problematic as the perception of risk increases.

4. The Fed’s swap lines ($522 billion outstanding, last i saw) help the rest of the world to fund themselves in USD.

In an effectively regulated environment, such as the US banking system, this works reasonably well but still carries a considerable risk that we decide to take as a nation for further public purpose. (it is believed the financial sector helps support useful domestic output, etc.)

Any slip up in regulation can result in the likes of the S&L crisis, and arguably the sub prime crisis, which results in a substantial disruption of real output and a substantial transfer of nominal and real wealth.

The Fed is lending to foreign CB’s in unlimited quantities, secured only by foreign currency deposits, to world banking systems it doesn’t regulate, and where regulation is for foreign public purpose.

The US public purpose of this is (best I can determine) to lower a foreign interest rate set in London called ‘LIBPR,’ and ‘perhaps’ to ‘give away’ USD to support US exports.

The Fed yesterday, for example, announced $30 billion of said lending to Mexico and Brazil for them to lend to their banks. The Fed must be a lot more comfortable with Mexico and Brazil’s bank regulation and supervision than I am, and certainly than Congress would be if they had any say in the matter.

5. The problem is that once the Fed provides funding to these foreign Central Banks, who then lend it all to their banking systems, they remove the foreign ‘funding pressure’ that was causing rates to be a couple of % higher over their (didn’t change our fed funds rate). Taking away the pressure takes away the incentives of the pressure to repay $US’s introduces.

The Fed is engaging in a major transfer of wealth from here to there. Initially its prevents the transfer of wealth back to the US, as would have happened if they had been forced to repay and eliminated their USD liabilities and losses.

That same force if continued develops into large increases in USD spending around the world as this ‘free money’ going to banking systems with even less supervision and regulation than ours soon ‘leaks out’ to facilitate increasing foreign consumption at the expense of USD depreciation.

Note the bias- the ECB gets an unlimited line and Mexico is capped at $30 billion.

This means the Fed is making a credit judgment of Mexico vs the ECB, which means the Fed is aware of the credit issue.

Conclusion, the Fed is beginning to recognize the swap lines are potentially explosively inflationary, as evidenced by not giving Mexico unlimited access.

The swap lines are also problematic to shut down should that start to happen, just like what shutting down lending to emerging markets did in the past.

Shutting down the swap lines would trigger the defaults that the unlimited funding had delayed, and then some, triggering a collapse in the world economies.

It’s a similar dynamic to funding state owned enterprises- the nominal costs go up and the losses go up as well should they get shut down.

Keeping them going is inflationary, shutting them down a major disruption to output and employment.

It is delaying the circumstances that were headed toward a shut down of the European payments system, but leaving the risks in place for the day the swap lines are terminated.

7. Bottom line- it looks to me that the swap lines are a continuation of the weak dollar policy Bernanke (student of the last gold standard depression) and Paulson have been pushing for the last couple of years.

This time they are ‘giving away’ dollars to foreigners, in unlimited quantities, ultimately to buy US goods and services.

They are doing this to support export led growth for the US, at the direct expense of our standard of living. (declining real terms of trade)

They are doing this to increase ‘national savings’- a notion applicable under the gold standard of the early 1930′s to prevent gold outflows, and where wealth is defined as gold hoards. This notion is totally non applicable to today’s convertible currency.

It is a failure to understand the indisputable Econ 101 fundamental that exports are real costs and imports real benefits.

They believe they are doing the right thing and that this is what’s good for us.

The unlimited swap lines are turning me into an inflation hawk longer term.

But the USD may not go down against all currencies, as potentially the inflation will hit other currencies as well.

Where to hide? I’m back to quality rental properties and energy investments.

The world is moving towards increased demand with no policy to make sure that doesn’t result in increased energy consumption and increasing inflation.

Comments welcome!



Posted in Email, Fed | 42 Comments »

More on latest Fed swap lines

Posted by WARREN MOSLER on 30th October 2008

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The Fed is able to unilaterally lend (functionally unsecured) $30 million each to Mexico and Brazil?!?!

There are far more sensible ways to restore prosperity.

Last figures I saw indicate $522 billion in these loans that have been advanced so far.

It’s looking more and more to me like this massive USD lending to foreign CB’s who reloan it to entities with the slimmest of collateral, is both a transfer of real wealth away from the US and a highly inflationary bias.

For the moment it’s halting deflation, but once unleashed there’s no telling where it will go.

Fed Opens Swaps With South Korea, Brazil, Mexico

By Steve Matthews and William Sim

Oct. 30 (Bloomberg) — The Federal Reserve agreed to provide $30 billion each to the central banks of Brazil, Mexico, South Korea and Singapore, expanding its effort to unfreeze money markets to emerging nations for the first time.

The Fed set up “liquidity swap facilities with the central banks of these four large systemically important economies” effective until April 30, the central bank said yesterday in a statement. The arrangements aim “to mitigate the spread of difficulties in obtaining U.S. dollar funding.”


Posted in Articles, Fed | No Comments »

More USD swap lines

Posted by WARREN MOSLER on 30th October 2008

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The problem is the Fed doesn’t see the risks involved in this program.

They are only seeing ‘success’ as USD interest rates fall for lesser credits around the world.

The question is why they would want USD rates to come down for lower quality borrowers?

This policy does not reduce international USD borrowings.

Instead, it supports and encourages increased USD borrowings with attractive USD rates and terms.

And in unlimited quantities for the ECB, BOE, BOJ, and SNB.

Yes, unlimited USD lending to anyone who can breathe in and out lowers rates.

And as it’s going to several entities that will probably never pay it back, it’s the largest monetary handout/transfer of wealth of all time.

It’s also a policy that, once implemented, historically has become more than problematic to shut down.

US Fed launches four new currency swap lines

By David Lawder

WASHINGTON, Oct 29 (Reuters) – The Federal Reserve on Wednesday extended U.S. dollar liquidity aid beyond traditional markets, opening four new $30 billion currency swap lines with Brazil, Mexico, South Korea and Singapore.

The temporary arrangements, authorized through April 30, 2009, are aimed at easing global U.S. dollar funding shortages, the Fed said.

“These facilities, like those already established with other central banks, are designed to help improve liquidity conditions in global financial markets and to mitigate the spread of difficulties in obtaining U.S. dollar funding in fundamentally sound and well-managed economies,” the Fed said in a statement released in Washington.

The decision comes a day after the Fed established a $15 billion swap line with the Reserve Bank of New Zealand. The U.S. central bank now has 13 swap lines with foreign central banks.


Posted in Articles, ECB, Fed | No Comments »

2008-10-30 USER

Posted by WARREN MOSLER on 30th October 2008

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GDP QoQ Annualized (3Q A)

Survey -0.5%
Actual -0.3%
Prior 2.8%
Revised n/a

A bit better than exected, and longer term the chart shows gradual declining rates of growth of GDP.

Karim writes:

  • GDP weak across the board
  • Economy contracts at 0.3% annualized rate in Q3
  • Sector changes (all annualized)
  • Personal consumption -3.1%
  • Non residential investment -1%
  • Residential investment (housing) -19.1%
  • Exports 5.9% (from 12.3%)
  • Government 5.8%

Government spending to keep the numbers from being a lot worse.


GDP YoY Annualized Real (3Q A)

Survey n/a
Actual 0.8%
Prior 2.1%
Revised n/a

Same, been trending down for quite a while.


GDP YoY Annualized Nominal (3Q A)

Survey n/a
Actual 3.4%
Prior 4.1%
Revised n/a

Nominal is sagging as well, indicating weakening nominal demand.


GDP Price Index (3Q A)

Survey 4.0%
Actual 4.2%
Prior 1.1%
Revised n/a

Higher than expected, but of no concern to a ‘forward looking’ Fed.




Core PCE QoQ (3Q A)

Survey 2.5%
Actual 2.9%
Prior 2.2%
Revised n/a

Core continues to march higher, and unless crude prices stay at the lows this can continue for several quarters.


Initial Jobless Claims (Oct 25)

Survey 475K
Actual 479K
Prior 478K
Revised 479K

Still looks to be moving up.

Karim writes:

  • Initial unchanged at 479k but no hurricane effects so underlying trend weaker by about 12-15k
  • Continuing claims drop 12k from upwardly revised 3727k to 3715k
  • Looks like -250 to -300k on next payrolls.


Continuing Claims (Oct 18)

Survey 3735K
Actual 3715K
Prior 3720K
Revised 3727K

Near previous peaks, remains high.


Jobless Claims ALLX (Oct 25)


Posted in Daily | No Comments »

Hungary to meet euro terms earlier

Posted by WARREN MOSLER on 29th October 2008

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Note the contractionary terms highlighted below:

Hungary Pays With Growth Prospects for IMF-Led Bailout Package

By Zoltan Simon

Oct. 29 (Bloomberg) — Hungary will meet euro-adoption term faster than previously planned after securing a 20 billion-euro ($25.5 billion) aid package to stabilize its recession-bound economy.

The country should adopt the euro “the faster the better,” Economy Minister Gordon Bajnai and Andras Simor, the head of the central bank told reporters today. The aid package will “unequivocally” stem the financial crisis in local markets, Bajnai said.

Hungarian stocks, bonds and the currency plunged this month because of concern that the country may have difficult financing its budget and current account deficits.

The aid package will help Hungary with its balance of payments and increase investor confidence by more than doubling foreign-currency reserves, Simor said.

The central bank, which raised the benchmark interest rate last week to 11.5 percent, the EU’s highest, from 8.5 percent to halt the currency’s plunge, will “think it over” on the direction of monetary policy after the rescue plan, Simor said. The bank continues to aim for price stability, he said.

To reduce country’s reliance on external financing, Prime Minister Ferenc Gyurcsany plans to cut spending next year by freezing salaries and canceling bonuses for public workers and reducing pensions. Hungary today also canceled all government bond auctions through the end of the year.

The standby loan, which Hungary can draw on as needed, will more than double the country’s 17 billion euros worth of foreign currency reserves, Simor said. The loan carries an interest rate of 5 percent to 6 percent, a standby fee of 0.25 percent annually and can be repaid in three to five years. Hungary can access the funds until March 2010, Simor said.

Part of the loan will be used to provide liquidity to banks, Simor said, without elaborating. Banks in Hungary have started to curtail or suspend foreign currency lending because of the difficulty in accessing euros and Swiss francs, the most popular foreign currency loans.

Euro applicants must keep inflation, debt and budget deficits within check. Hungary expects consumer prices to rise 4.5 percent, with a budget deficit at 2.6 percent of gross domestic product and declining debt next year.


Posted in Articles | 3 Comments »

Austria abandons bond offering

Posted by WARREN MOSLER on 29th October 2008

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Not looking at all promising.

Austria abandons bond offering

By David Oakley

Austria, one of Europe’s stronger economies, cancelled a bond auction yesterday in the latest sign that European governments are facing increasing problems raising debt in the deepening credit crisis.

The difficulties of Austria, which has a triple A credit rating, highlights the extent of the deterioration, which saw benchmark indicators of credit risk such as the iTraxx index hit fresh record wides yesterday.

Austria is the fourth European country to cancel a bond offering in recent weeks amid growing worries over its exposure to beleaguered eastern European economies such as Hungary.

Hungary, which has been forced to turn to the International Monetary Fund to shore up its crisis-hit economy, also scrapped an auction for short-term government bills after only attracting Ft5bn ($22.5m) in a Ft40bn offering.

Analysts said Austria had dropped plans to launch a bond next week because investors wanted bigger premiums to offset the credit worries and fears over lending by its banks to eastern Europe.

The Austrian Federal Financing Agency did not give a reason for the move.

Spain, another triple A rated country, and Belgium have cancelled bond offerings in the past month because of the turbulence, with investors demanding much higher interest rates than debt managers had bargained for.

Market conditions have steadily deteriorated in recent days with the best gauge to credit sentiment, the iTraxx investment grade index, which measures the cost to protect bonds against default in Europe, widening to more than 180 basis points, or a cost of €180,000 to insure €10m of debt over five years, yesterday.

This is a steep increase since Monday of last week, when the index closed at 142bp.

Huw Worthington, European strategist at Barclays Capital, said: “These are difficult markets. Austria did not need to raise the money, so it has decided to hold off but, if these conditions persist, it could prove a problem for some governments as their debt needs to be refinanced.”

Analysts warn that the huge pipeline of government bonds due to be issued in the fourth quarter and next year could increase problems for some countries, particularly those already carrying large amounts of debt that needs to be refinanced or rolled over.

European government bond issuance will rise to record levels of more than €1,000bn in 2009 – 30 per cent higher than 2008 – as governments seek to stimulate their economies and pay for bank recapitalisations.

The eurozone countries will raise €925bn ($1,200bn) in 2009, according to Barclays Capital. The UK, which is expected to increase its bond issuance from the current €137.5bn in the 2008-09 financial year, will take the figure above €1,000bn.

Italy, with a debt-to-gross domestic product ratio of 104 per cent, is most exposed to continuing difficulties in the credit markets. Analysts forecast that it will need to raise €220bn in 2009.


Posted in Articles | 8 Comments »

Updates on Fed swap lines

Posted by WARREN MOSLER on 29th October 2008

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Still don’t have totals for Fed USD swap lines extended to Foreign CBs.

Some info here from last week:

ECB Lending, Liabilities Surge to Records Amid Crisis (Update 1)

By Simon Kennedy

Oct. 21 (Bloomberg) — The European Central Bank’s lending to banks and its exposure to possible collateral losses jumped to records last week as the battle against the credit crisis forced policy makers to shoulder more risk.

The Frankfurt-based ECB said it loaned banks 773.2 billion euros ($1.02 trillion) through monetary operations, up from 739.4 billion euros a week earlier and a 68 percent surge from the first week of September. Its liabilities to financial institutions rose to 470.3 billion euros, an increase of 4.4 percent from the previous week and up 123 percent since the start of last month.

While I’m less concerned over the ECB’s increased Euro lending it nonetheless indicates problems have not subsided.

The ECB is following the Federal Reserve and other central banks in combating the credit crunch by expanding its balance sheet as it injects more cash into the banking system. The downsides include taking on more risk as it accepts weaker collateral when lending.

“The urgency of the situation means that drastic measures need to be taken,” said David Mackie, chief European economist at JPMorgan Chase & Co. “Up until a month ago the balance sheet wasn’t growing. Now the bank is creating more and more money.”

The ECB became more aggressive after the collapse of Lehman Brothers Holdings Inc. on Sept. 15 prompted banks to hoard cash worldwide. To spur lending, the central bank has loaned money for longer timeframes and offered banks unlimited amounts of dollars and euros. It last week loosened rules on the collateral it will accept when making loans to include lower-rated securities, certificates of deposit and subordinated debt.

Demand for Cash

The ECB today said it loaned banks 305 billion euros in its regular weekly auction at a fixed rate of 3.75 percent. It also provided $101.93 billion in a 28-day dollar tender at a fixed rate of 2.11 percent, and an additional $22.6 billion, also for 28 days, via a currency swap against euros.

Don’t know what the total USD advances outstanding are.

With the financial crisis spilling over into the economy, demand for banknotes has also jumped. The value of notes in circulation rose to 721.8 billion euros, an increase of 9.7 billion euros from the previous week and 5.4 percent from the start of last month, today’s ECB data showed.

The eurozone is facing a ‘bank run’ as depositors flee to actual cash. This puts the banking system at risk with their current institutional structure.

When Lehman Brothers sought bankruptcy protection, its Frankfurt division owed between 8 billon euros and 9 billion euros to the ECB, the Wall Street Journal reported Oct. 7, without saying where it obtained the information.

ECB President Jean-Claude Trichet has said that while the bank is assuming more risk, it is doing so because of the greater threat of financial meltdown. “We have made decisions which are increasing our risks,” Trichet said in an Oct. 19 interview with France’s RTL Radio. “We are facing a systemic liquidity problem of first importance.”

The ECB’s risk-taking may be paying off. The cost of borrowing euros for three months fell to the lowest level today since Lehman filed for bankruptcy. The London interbank offered rate, or Libor, that banks charge each other for such loans dropped 3 basis points to 4.96 percent today, the British Bankers’ Association said. That’s the lowest level since Sept. 12. The overnight dollar rate slid 23 basis points to 1.28 percent, below the Federal Reserve’s target for the first time since Oct. 3.

This would be near my last choice of ways to get term rates down!


Posted in Articles, Fed | 5 Comments »

Zero rate!

Posted by WARREN MOSLER on 29th October 2008

[Skip to the end]

Yes, but, of course, for the wrong reasons!

They all still act and forecast as if lower rates are expansionary.

This still has no support in theory or practice.

Outstanding government debt means the private (non-government) sectors are net savers.

Households remain net savers.

Lower rates directly cuts personal income.

And lowers costs for businesses including costs of investments that reduce costs.

I do favor a permanent zero interest rate policy.

That would mean the same amount of government spending needs less in taxes to support it (larger deficit).

Ex-Fed Gov. Meyer Makes a Case for a Zero Fed-Funds Rate

By Brian Blackstone

With the U.S. unemployment rate now expected to climb well above 7%, former Federal Reserve governor Laurence Meyer projects that Fed policymakers may have to lower the target federal-funds rate all the way to zero next year.

“However, the expected rise in the unemployment rate, paired with the rising threat of deflation, presents a risk that the FOMC will have to ease even further, perhaps all the way to a zero federal funds rate,” Meyer and Sack wrote in a research note.

Meyer and Sack said they think the jobless rate will rise to as high as 7.5% from 6.1% now. They also expect a significant gross domestic product contraction of 2.8%, at an annual rate, in the fourth quarter, after a projected 0.7% decline in the third. They also expect GDP to fall in the first quarter of next year.

Meyer and Sack expect the Fed’s preferred inflation rate gauge — the price index for personal consumption expenditures excluding food and energy — to moderate to just 1% growth, at an annual rate, by the end of 2010.

“Plugging our interim forecast into our backward-looking policy rule suggests that the federal funds rate should be cut to zero by the middle of next year,” Meyer and Sack wrote.

“Our forward-looking policy rule…gives similar results if we plug in our updated forecast, as it calls for a funds rate of about zero by early 2010,” they wrote.


Posted in Articles, Fed, Interest Rates | 2 Comments »

Energy issues have not gone away yet

Posted by WARREN MOSLER on 29th October 2008

[Skip to the end]

It’s too early to say for sure the Mike Master’s sell off has run its course.

I looked at the announced OPEC supply cut as evidence they think it has.

Net supply issues remain and at least so far demand destruction has only meant a slowing growth of consumption.

Crude Oil Rises on Surge in Global Equities, Possible Fed Cut

By Alexander Kwiatkowski

Supply Declines

Global crude-oil output is falling faster than expected, leaving producers struggling to meet demand without extra investment, the Financial Times said, citing a draft of an International Energy Agency report.

Annual production is set to drop by 9.1 percent in the absence of additional investment, according to the draft of the agency’s World Energy Outlook obtained by the newspaper, the FT reported. Even with investment, output will slide by 6.4 percent a year, it said.

The shortfall will become more acute as prices fall and investment decisions are delayed, the newspaper said. The IEA forecasts that the rising consumption of China, India and other developing nations requires investments of $360 billion a year until 2030, it said.

OPEC Considers Meeting

The Organization of Petroleum Exporting Countries’ decision last week to trim production for the first time in almost two years failed to stop prices falling yesterday.

“If circumstances dictate we have another meeting, of course we will meet,” OPEC Secretary-General Abdalla el-Badri said at the Oil & Money conference in London. He said he expects a market response to last week’s output cut after about a week.

Shokri Ghanem, chairman of Libya’s National Oil Corp., echoed el-Badri’s comments, saying he’s watching the market to see whether it’s deteriorating or stabilizing.


Posted in Energy, Oil | No Comments »

2008-10-29 USER

Posted by WARREN MOSLER on 29th October 2008

[Skip to the end]

MBA Mortgage Applications (Oct 24)

Survey n/a
Actual 16.8%
Prior -16.6%
Revised n/a


MBA Purchasing Applications (Oct 24)

Survey n/a
Actual 303.10
Prior 279.30
Revised n/a

A small bounce to what are still very low levels.

But no sign of a collapse


MBA Refinancing Applications (Oct 24)

Survey n/a
Actual 1489.40
Prior 1158.80
Revised n/a


MBA TABLE 1 (Oct 24)


MBA TABLE 2 (Oct 24)


MBA TABLE 3 (Oct 24)


MBA TABLE 4 (Oct 24)


Durable Goods Orders MoM (Sep)

Survey n/a
Actual 0.8%
Prior -5.5%
Revised n/a


Durable Goods Orders YoY (Sep)

Survey n/a
Actual -2.4%
Prior -8.9%
Revised n/a

A volatile series. Up some but the overall trend is still looking lower.


Durables Ex Transportation MoM (Sep)

Survey n/a
Actual -1.1%
Prior -4.1%
Revised n/a


Durables Ex Defense MoM (Sep)

Survey n/a
Actual -0.6%
Prior -6.0%
Revised n/a


Durable Goods ALLX (Sep)


Posted in Daily | No Comments »

2008-10-28 USER

Posted by WARREN MOSLER on 28th October 2008

[Skip to the end]

ICSC UBS Store Sales YoY (Oct 28)

Survey n/a
Actual 1.30%
Prior 0.90%
Revised n/a

Maybe rebounding some with lower gas prices?


ICSC UBS Store Sales WoW (Oct. 28)

Survey n/a
Actual 0.50%
Prior -1.60%
Revised n/a


Redbook Store Sales Weekly YoY (Oct. 28)

Survey n/a
Actual 0.70%
Prior 0.80%
Revised n/a


Redbook Store Sales MoM (Oct. 28)

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


ICSC UBS Redbook Comparison TABLE (Oct. 28)


S&P CS Composite 20 YoY (Aug)

Survey -16.60%
Actual -16.62%
Prior -16.35%
Revised -16.32%


S&P Case Shiller Home Price Index (Aug)

Survey n/a
Actual 164.57
Prior 166.23
Revised 166.29

Still falling but at a slower rate


S&P Case Shiller Home Price Index YoY (Aug)

Survey n/a
Actual -15.38%
Prior -14.22%
Revised n/a


Case Shiller ALLX 1 (Aug)


Case Shiller ALLX 2 (Aug)


Consumer Confidence (Oct)

Survey 52.0
Actual 38.0
Prior 59.8
Revised 61.4

Major dip here.


Consumer Confidence ALLX 1 (Oct)


Consumer Confidence ALLX 2 (Oct)


Richmond Fed Manufacturing Index (Oct)

Survey -23
Actual -26
Prior -18
Revised n/a

Also bad.


Richmond Fed Manufacturing Index ALLX (Oct)


Posted in Daily | 1 Comment »

UK on track

Posted by WARREN MOSLER on 27th October 2008

[Skip to the end]

Brown’s Keynesianism is bankrupt- and will bankrupt us

Almost three months ago, this column described Prime Minister Gordon Brown, and his Chancellor Alistair Darling as “Keynesian”. The last decade of Brownite policy, after all, has featured high public spending, irresponsible borrowing and an ever-growing tax-burden.

by Liam Halligan

Until recently, though, Brown and his entourage have played down their “big government” tendencies – stressing prudence, private enterprise and the joys of lower tax.

But now, with the UK in the grip of the credit crisis New Labour has revealed its true statist colours. “We are spending more to get the economy moving,” said Brown last week. “That’s the right thing to do.”


Well, actually, it isn’t. The last 50 years are riddled with grim episodes of Western governments trying to spend their way out of recession. Every attempt has gone wrong – resulting in spiralling national debts, soaring inflation and a plunging currency.

Those are the financial outcomes, not real outcomes. And the last one was from a failed attempt at a fixed exchange rates- the ERM policy.

In 1976, then Labour Prime Minister Jim Callaghan made a passionate speech to his party conference, telling comrades “in all candour” that the option of reversing a downturn by “deficit-spending” simply “doesn’t exist”.

Callaghan was in a position to know. His Keynesian policies had destabilised the UK economy so seriously we were forced to go cap in hand to the International Monetary Fund.

The UK was forced to the IMF to borrow foreign currency to support the failed fixed exchange rate policy of the firm.

That’s right – the UK’s mid-1970s IMF bail-out, the indisputable nadir of this country’s post-war economic history, was the direct result of Keynesian policy.

No, it was a direct result of the failed ERM policy.

Yet, here we are 22 years on. The young left-wing firebrands who sneered at Callaghan’s brave admission now run the country. To gain power, they had to bury their beliefs, shave off their beards and parrot a faith in free markets.

Since 1997, despite this pretence, New Labour’s “soft Keynesian” concoction of high spending, loose credit controls and more tax has contributed mightily to our current predicament.

Not at all. In fact, tight fiscal have been the rule, and contributed to the current downturn.

But faced with a crisis, and with their backs to the electoral wall, the Brownites are reaching for the intellectual comfort blanket of their youth – the “hard Keynesian” solution of ramping up spending sharply.

Yes, and rightly so. This time with no ERM to trip over.

Because we’re in a crisis, though, Brown’s Keynesian declaration has raised barely any protest. That’s why the letter in today’s Sunday Telegraph is so important – which makes clear Keynesianism is a “misguided and discredited as a tool of economic management”. The economists who signed it cannot be dismissed as parti pris. The economic consensus against Keynesianism is based on evidence, not ideology.

For now, the airwaves are full of economists from investment banks and accounting practices whose firms stand to do quite nicely from a big dollop of extra public infrastructure spending.

These are the type of firms that benefit from the growth and strength of an economy.

Keynesianism? Bring it on, they say.

As should the citizens.

But there are many, many dismal scientists with serious misgivings – but who don’t have “media strategies”, and who perhaps lack the courage to voice their concerns, given that millions of people are frightened about their jobs.

And who doesn’t understand non-convertible currency with floating FX policy.

No one is denying the UK economy is in a bad place. New preliminary data shows the first quarterly output drop for 16 years. Between July and September, GDP fell 0.5 per cent, pushing annual growth down to 0.3 per cent.

Good thing they are looking to spend their way out of it.

As the signatories to our letter make clear, it is “inevitable government expenditure and debt rise in a recession” – as the “automatic stabilisers” kick in, the tax-take falls and benefit spending rises.

Yes, if you don’t do it proactively first.

But Brown’s plan goes way beyond that, posing huge dangers – not least as we’re starting from a position of extreme fiscal weakness.

What difference does that make???

Even last year, when growth was near trend, the Government borrowed £36bn – almost 3 per cent of GDP. And in only the first six months of this financial year, before the slowdown had really begun, we’ve already borrowed £38bn – a colossal 75 per cent up on the same period the year before.

And not nearly enough to support output and employment at the moment more is called for.

Even without Brown’s misty-eyed Keynesian adventure, the public finances are set to deteriorate rapidly. But imagine how bad the numbers will get.

‘Deteriorate’ and ‘bad’ are indicative of his backwards thinking.

as Brown, as he said last week, “brings forward” public spending from future years.

A mistake from Brown to say it that way. Spending is not operationally constrained by revenue. Brown isn’t quite there yet.

That can only lead to much higher taxation,

Maybe, but the same automatic stabilizers usually automatically do that, and usually too much so.

hobbling the private sector and increasing the danger of a drawn-out Japanese-style slump.

Yes, if they raise taxes to cut the deficit like Japan repeatedly did!

Extra Government spending won’t help anyway. Most of it will simply fuel state-sector wage growth – winning Brown a few trade union votes, but boosting wage inflation elsewhere.

‘Wage inflation’ as used here is pathetic. The question is whether demand increases translate into higher sales, output, and employment. If higher wages somehow don’t get spent they don’t contribute to higher output prices.

This is instead a statement against higher wages per se.

The broader macro-economic implications are also alarming. If we keep borrowing, in the end the gilts market will simply dry up.

While possible that they yield could creep up, it’s inaccurate and baseless to predict the market for gilts to dry up.

Japan is a good example, as is Turkey, of two nations at opposite ends of the spectrum, neither constrained by securities sales.

Already, the UK government faces massive age-related liabilities that will undermine our credit-rating over the next few years – before Brown’s final spending spree.

Credit rating is not an issue. UK spending in local currency is operationally not constrained by revenues.

And anyone who tells you inflation isn’t a problem is ignoring that borrowing itself is inflationary,

Huh??? Only spending can be inflationary, particularly if supported by higher costs (including interest rates)

and that the latest bank bail-outs will see the Bank of England printing money on a scale unprecedented in modern times.

The BOE is only exchanging one financial asset for another. It’s ‘printing money’ only if you include some financial assets and not others in the ‘money supply’.

This is the first serious slowdown under Labour – since 1976 – and a moment of acute economic danger. A wounded, desperate Prime Minister is making a final roll of the dice.

Fortunately the right one.

Faced with a desperate electorate, he is reaching for Keynesianism. It serves, also, as a fig-leaf for his previous profligate spending and as a bone to the Labour left.

But it is, indisputably, an immensely dangerous and counter-productive idea. That’s why economists must stand up and be counted.

Yes, especially the ones who support it!

The dismal scientists must speak out.


Posted in UK | No Comments »

Aussies buy their own currency

Posted by WARREN MOSLER on 27th October 2008

[Skip to the end]

“Australia’s central bank has intervened to support the tumbling Australian dollar, but failed to prevent its slide to five-year lows against the U.S. currency and its deepest-ever trough against the yen. “

This intervention has two purposes.

One is to keep the decline orderly, the other is anti-inflationary, as the apparent collapse in the currency is immediately passed through to import prices, which play a major role in domestic consumption.

The problem in using intervention to support one’s own currency is that reserves get depleted before the desired level of the currency is achieved.

One core issue is declining real terms of trade due to falling prices of Australia’s exports vs. the prices of their imports.

The other issue is internal distribution.

Australia digs and exports coal, for example, and the boats return full of consumer goods.

A falling currency alters distribution of consumption to those residents in export industries and away from the rest of the population.

The recent US history:

Over one year ago Paulson successfully got foreign CBs to stop buying dollars.

That, along with rising crude prices, sent the dollar to its subsequent lows.

He did this by calling CBs buying dollars currency manipulators and outlaws, insisting they let markets decide currency values.

This was a thinly veiled ploy to get the dollar down to spur exports, as articulated by the Fed chairman in subsequent congressional testimony.

It ‘worked’ as US exports grew at record pace and US GDP muddled through at modestly positive numbers. (A nation net imports exactly to the extent non residents realize their desire to accumulate its net financial assets, as discussed in previous posts)

It also caused a punishing decline in real terms of trade for the US and a decline in the US standard of living, but that was less important to policy makers than ‘pretty trade numbers’ and sustaining domestic demand via sufficiently supportive fiscal policy.

This all caused demand to fall overseas, as governments were (and for the most part remain) in the dark as to sustaining domestic demand, and their economies were directly or indirectly connected to exports to the US.

After Q2 this year rising US exports and falling non-petro imports broke the back of world economies and it has all come crashing down.

Falling crude prices due to ‘the great Mike Masters sell off’ (that I’m still waiting to run its course, and which last week’s OPEC cuts may be signaling), also made dollars a lot tougher to get and created a dollar squeeze on a world that had quietly gotten strung out on dollar borrowings.

Accumulating USD by non-residents to pay off debt in the private sectors is working to strengthen the USD the same way foreign CB accumulation had done.

It is bringing down their currencies and will eventually support foreign exports (at the expense of their real terms of trade, but that’s another story).

The US trade gap will fall substantially for a while as crude prices work their way into the numbers.

But then, should world private sector dollar ‘savings’ get rebuilt via USD debt reduction, make foreign goods cheap enough for US imports to once again start to grow.

A substantial increase in US domestic demand via deficit spending (which should be forthcoming with an Obama presidency and democratic control in both houses of Congress.) can restore domestic output, employment, and US imports, to restore our standard of living to pre-Paulson levels.

If we have a policy that drops energy imports, otherwise we can give it all back in short order.

But that’s all getting ahead of one’s self.

For now, the strong dollar seems to be giving foreign CBs, like the RBA in Australia, an inflation scare even as their economies weaken, housing prices sag, and unemployment rises.

This is typical of emerging market economies- external debt burdens high inflation due to weak currencies (due to debt service from the external debt- they need to sell local currency to meet their external debt payments) high unemployment deteriorating real terms of trade as export prices fail to keep up with import prices.

Again, sorry for the earlier mix-up. Need to get my eyes checked!


Posted in Currencies | 17 Comments »

Japan Daily

Posted by WARREN MOSLER on 27th October 2008

[Skip to the end]

This means they will accept it as collateral for the unlimited USD loans from the Fed.

This will not end well.

BOJ to Accept Asset-Backed Commercial Paper as Collateral from Tuesday

TOKYO (Dow Jones)–The Bank of Japan said Monday it will accept as collateral asset-backed commercial paper guaranteed by the bank’s counterparty financial institutions, starting Tuesday. This is a temporary measure until the end of April 2009 to ease tension in the short-term money market, the BOJ said.

Earlier this month, The BOJ announced a number of steps to ensure the smooth functioning of the country’s money markets, including providing greater access to U.S. dollar funds through a swap agreement with the U.S. Federal Reserve Board, and broadening the kinds of collateral the BOJ would accept for repurchase agreement transactions.


Posted in Japan | 1 Comment »

2008-10-27 CREDIT

Posted by WARREN MOSLER on 27th October 2008

[Skip to the end]

Stocks may have nowhere to go until these spreads narrow

IG On-the-run Spreads (Oct 27)


IG6 Spreads (Oct 27)


IG7 Spreads (Oct 27)


IG8 Spreads (Oct 27)


IG9 Spreads (Oct 27)


Posted in Credit | No Comments »

IMF Ukraine loan and conditions counterproductive

Posted by WARREN MOSLER on 27th October 2008

[Skip to the end]

UPDATE 3-IMF, Ukraine agree $16.5 bln loan with conditions

By Sabina Zawadzki and Lesley Wroughton

KIEV/WASHINGTON, Oct 26 (Reuters) – The International Monetary Fund and Ukraine said on Sunday they had reached an agreement in principle for a $16.5 billion loan package to ease the effects of the global financial crisis.

But analysts said politicians would have to set aside differences to adopt a set of financial measures needed to clinch the deal and secure the loan.

The IMF statement said nothing about the conditions it sought from Ukraine. But a joint central bank and finance ministry statement said the government would have to draw up a balanced budget and introduce measures to support banks.


Posted in Articles | No Comments »

Interview with the BBC

Posted by WARREN MOSLER on 27th October 2008

[Skip to the end]

(email exchange)

Dear David:

Let me refer you to what I call “Mosler’s Law”: There is no financial crisis so deep that a sufficiently large increase in public spending cannot deal with it.

But the European problem is, who can borrow? who can spend?

Solving that problem is the key – the only key – to resolving the crisis.

Regards, James

>   Professor Galbraith,
>   This is David … I’m a BBC Spanish listener. You told that the European
>   Central Bank has not the same solid structure as the banking system in
>   the States. I want to ask you what does Europe has to do to recover
>   from this crisis? Ok, deliver less credits and mortgages maybe, I don’t
>   know, you know it much better than me. But how the recovery will be
>   seen through a decrease in unemployment? what does Spain has to do?
>   Call me David (only 43)
>   Yours sincerely,
>   David …


Posted in UK | 7 Comments »

2008-10-27 USER

Posted by WARREN MOSLER on 27th October 2008

[Skip to the end]

New Home Sales (Sep)

Survey 450K
Actual 464K
Prior 460K
Revised 452K

Small blip up from very low levels.


New Home Sales Total for Sale (Sep)

Survey n/a
Actual 394.00
Prior 425.00
Revised n/a

Inventories low enough to cause a shortage if things do pick up.


New Home Sales MoM (Sep)

Survey -2.2%
Actual 2.7%
Prior -11.5%
Revised -12.6%


New Home Sales YoY (Sep)

Survey n/a
Actual -33.1%
Prior -35.6%
Revised n/a

Also moving up a bit.


New Home Sales Median Price (Sep)

Survey n/a
Actual 218.40
Prior 220.40
Revised n/a

Down some but not in collapse.


New Home Sales TABLE 1 (Sep)


New Home Sales TABLE 2 (Sep)


Posted in Daily | No Comments »