Daily Archives: November 6, 2008 @ 10:48 am (Thursday)

Initial recommendations for President Obama

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Initial recommendations for President Obama:

  • Offer a $10 per hour national service job to anyone willing and able to work.
  • Declare a payroll tax holiday and have the Treasury make all FICA payments at least until the economy is deemed to be ‘overheating.’
  • Cut the national speed limit for private ground transportation to 30 mph to immediately reduce gasoline consumption (and save lives).
  • Implement needed infrastructure spending for deferred maintenance.
  • Suspend the Fed swap line program.
  • Suspend a variety of the recent, counterproductive assistance programs to the financial sector.


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Falling consumption

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Falling consumption and rising unemployment means the private sector wants to work and get paid, but doesn’t want to spend its earnings on consumer goods.

No problem!

Depending on one’s politics, this allows government to increase spending to employ the idle resources for public purpose, such as infrastructure, etc.

Or alternatively, to cut taxes until consumption resumes. Or some combo of both.

The government spending is not financially constrained. The applicable constraint is the quantity of real resources offered for sale.


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Yen strength

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BOJ Helpless as Yen Rises on Carry, UBS, Barclays Say

by Ron Harui and Stanley White

Nov. 6 (Bloomberg) — The Bank of Japan may be powerless to prevent the yen from rising to a 13-year high, according to the world’s biggest foreign-exchange traders.

Wrong! Japan can sell yen and buy dollars until the cows come home, if they wanted to. What’s stopping them (so far) is the risk of Paulson’s wrath.

As the US-Paulson/Bernanke/Bush- continues its ‘weak dollar’ policy to support US exports. Falling crude prices have (temporarily?) thwarted their efforts and strengthened the dollar. (And the euro has it’s own special issue as previously discussed.)


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Re: Obama’s Yuan Calls- NOT GOOD

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>   
>   On Thu, Nov 6, 2008 at 7:09 AM, Michael wrote:
>   

Obama’s Yuan Calls May Put U.S. on Collision Course With China

by Judy Chen

Nov. 6 (Bloomberg) — Barack Obama’s calls for changes in China’s yuan policy may put the president-elect on a collision course with the U.S.’s second-largest trade partner, which is holding the currency stable to support its export-led economy.

Obama said China must stop manipulating the currency in a letter to the National Council of Textile Organizations released on Oct. 24.

This is counter productive for the US standard of living.

Obama has yet to discover imports are real benefits and exports real costs.

The People’s Bank of China has kept the yuan almost unchanged against the dollar since mid-July as it shifts focus from countering inflation to sustaining growth amid a global credit crisis. The Foreign Ministry said last week the U.S. shouldn’t blame its trade deficit on exchange rates.

“Obama may exert more pressure on China’s foreign-exchange policy to boost U.S. exports and curb unemployment, but China will first consider its own economic fundamentals,” said Ha Jiming, Hong Kong-based chief economist at China International Capital Corp., the nation’s first Sino-foreign investment bank.

Hopefully, Obama will see the light and it will instead be a case of ‘when the facts change I change’.

Policy of Stability
Paulson said on Oct. 21 that he is “pleased” that China’s currency has appreciated more than 20 percent since a peg against the dollar was abandoned in July 2005.

Paulson either has it backwards, or he’s being subversive.

“It will be emphasized in the next Strategic Economic Dialogue that it is more important than ever that China should rely more on domestic demand rather than its trade surplus to sustain economic growth,” said Nicholas Lardy, senior fellow at the Peterson Institute for International Economics in Washington.

Same- ignorant or subversive are the only possibilities.

“Currency manipulation has been a quite specific implication in law, and no other president has ever used that term,” said Straszheim. If Obama doesn’t take actions following the charge that China is manipulating the yuan, “he will be regarded as another old type politician who promises one thing during the campaign and does another in office,” he added.


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ECB expected to cut rates 50 bps today

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ECB to Cut Rates as Slump Calls for `Radical Action’

by Christian Vits

Nov. 6 (Bloomberg) — The European Central Bank will cut interest rates for the second time in less than a month today as the region’s economy suffers its worst slump in 15 years, economists said.

“It’s time for radical action,” said Ken Wattret, an economist at BNP Paribas SA in London. “This is a very severe economic downturn, interest rates should come down a long way.”

Obviously they still haven’t figured out lower rates will make matters worse, as lower rates cut government interest payments (it’s a spending cut) which removes income paid to the private sectors.

The only aspect that might help is the hope that the lower rates drive the currency lower. This is one of those ‘be careful what you wish for’ conditions.

First, with falling aggregate demand around the world, export growth will be problematic even with the lower real wages that come from a lower currency.

Second, a falling currency raises import prices and reduces real terms of trade, particularly for a large energy importer like the eurozone.

Third, anything that weakens the economy and lowers standards of living is socially dangerous.

Fourth, the problems of USD debt including USD losses growing as a % of euro based capital and income that have been driving the euro down remain and the risk of an acceleration of this process increases as the eurozone economies weaken.


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German fiscal balance

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The fastest economic growth this decade in 2006, Merkel’s first full year in power, and in 2007 helped her administration to narrow the deficit. The economy expanded 2.9 percent in 2006 and 2.5 percent last year, helping cut cumulative public sector deficit to 37 billion euros and 400 million euros respectively.

Budget surpluses ran last year by Germany’s states and municipalities outweighed a federal deficit to create the country’s first balanced budget since 1969. European Union rules on taming budget deficits apply to the composite budget.

Fiscal policy got a lot tighter than I had realized. No wonder it’s coming down so hard.


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Re: Fed finally gets interest on reserves right

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(email exchange)

Yes, a very obvious move for anyone with any sense of logic.

Again, we see continued evidence that the higher ups do not understand their own monetary operations.

Some of the remaining issues:

The TAF should at a minimum be unlimited and offered at a fixed rate, and the collateral requirements can be expanded to any bank legal assets.

The Fed should get Congressional approval to expand their treasury lending facility and lend any security in unlimited quantities at an overnight rate at a small
spread below their target Fed funds rate.

The Fed should cut off the (unlimited) swap lines to foreign central banks before it’s too late.

>   
>   On Wed, Nov 5, 2008 at 11:43 PM, Scott wrote:
>   

Press Release

Federal Reserve Press Release

Release Date: November 5, 2008
For release at 10:00 a.m. EST

The Federal Reserve Board on Wednesday announced that it will alter the formulas used to determine the interest rates paid to depository institutions on required reserve balances and excess reserve balances.

Previously, the rate on required reserve balances had been set at the average target federal funds rate established by the Federal Open Market Committee (FOMC) over a reserves maintenance period minus 10 basis points. The rate on excess balances had been set as the lowest federal funds rate target in effect during a reserve maintenance period minus 35 basis points. Under the new formulas, the rate on required reserve balances will be set equal to the average target federal funds rate over the reserve maintenance period. The rate on excess balances will be set equal to the lowest FOMC target rate in effect during the reserve maintenance period. These changes will become effective for the maintenance periods beginning Thursday, November 6.

The Board judged that these changes would help foster trading in the funds market at rates closer to the FOMC’s target federal funds rate.


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Re: Letter to ABC

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Good letter!!!!

>   
>   On Wed, Nov 5, 2008 at 3:59 PM, Bill wrote:
>   
>   Dear ABC breakfast,
>   
>   Headlines like – 40 billion hole in the bucket – repeated by the breakfast
>   hosts today – merely perpetuate the myth that the Federal government
>   has a financial constraint. This myth has been used by the neo-liberal
>   agenda that is now in tatters as a result of the failure of markets to
>   self-regulate.
>   
>   
>   The reality is that the Federal G. as the monopoly issuer of the currency
>   has no financial constraint and does not require revenue to spend. In
>   fact, spending provides the funds to the private sector that we use to
>   fulfill our tax obligations.
>   
>   Further, the pursuit of budget surpluses has squeezed the liquidity of
>   the private sector and been an important part of the reason why that
>   sector is now so indebted. The natural state is for the federal
>   government to run deficits in order for the private sector to save. The
>   private sector cannot save if the government is running surpluses.
>   
>   Further, running surpluses (or deficits) in any one year makes no
>   difference to the capacity of the Federal G. to run a surplus (deficit) in
>   the next. The surpluses that have been adored by the neo-liberals and
>   by the sin of ignorance of your announcers have not built up any
>   capacity to allow spending to proceed now. There is no hole in the
>   bucket. There is no bucket!
>   
>   I have written a lot about this over the year. My recent book (see
>   details below) articulates this in detail. You can also read details of how
>   a modern monetary economy like Australia works from the many papers
>   available from my research centre.
>   
>   It would be good if you stopped perpetuating this myth and instead
>   allow reasonable commentary on what is actually going on with
>   government opportunities etc. It is time your listeners (and viewers)
>   learned how the economy actually operates and how they have been
>   dudded by fiscal surpluses over the last 11 years.
>   
>   Best wishes,
>   
>   Bill
>   


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2008-11-06 USER

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Nonfarm Productivity QoQ (3Q P)

Survey 0.7%
Actual 1.1%
Prior 4.3%
Revised 3.6%

 
Better than expected but slipping a bit.

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Nonfarm Productivity TABLE 1 (3Q P)

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Nonfarm Productivity TABLE 2 (3Q P)

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Unit Labor Costs QoQ (3Q P)

Survey 3.0%
Actual 3.6%
Prior -0.5%
Revised -0.1%

 
Worse than expected but still reasonable.

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Unit Labor Costs ALLX (3Q P)

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Initial Jobless Claims (Nov 1)

Survey 477K
Actual 481K
Prior 479K
Revised 485K

 
About at recession levels.

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Continuing Claims (Oct 25)

Survey 3743K
Actual 3843K
Prior 3715K
Revised 3721K

 
Also looking like recession levels.

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Jobless Claims ALLX (Nov 1)

 
Karim writes:

  • Initial claims fall 4k to 481k, but prior week revised up 6k to 485k (4wk avg 477k)
    Real story is latest jump in continuing claims, from 3721k to 3843k (4wk avg 3754k)


  • Higher continuing claims tied to longer duration of unemployment and in turn lower wage pressures


  • Now look for payrolls to exceed -300k tomorrow; would be consistent with across the board weaker-than-expected data for past month.


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