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The last thing we need to do is encourage policies that empower billions of foreign consumers to compete with us for scarce real resources and diminish our real terms of trade.

But that’s what happens with an administration that does not understand the monetary system.

Obama seeks ‘Sustained’ Fiscal Stimulus in G-20 Summit Appeal

by Tony Czuczka

Mar 24 (Bloomberg) — President Barack Obama urged fellow Group of 20 leaders to provide a “robust and sustained” fiscal stimulus, saying that “much more” action is needed to fight the global recession.

In an article published today in newspapers including Germany’s Die Welt and the Paris-based International Herald Tribune, Obama also urged increased funding for international lenders and a “common framework” of steps to restore the world economy’s flow of credit.

“Our efforts must begin with swift action to stimulate growth,” Obama said in the article laying out U.S. goals for the G-20 summit in London on April 2. “Other members of the G- 20 have pursued fiscal stimulus as well, and these efforts should be robust and sustained until demand is restored.”

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The Geithner plan is the latest move in what is shaping up to be the largest upward distribution of real wealth in US history.

Its stated purpose is to provide high enough risk adjusted returns to attract ‘private capital’ at a time where risk perceptions are elevated.

This means ‘market forces’ will offer ultra high returns for the investor class and the financial sector in general to attract the desired private sector participation.

High unemployment will ensure real wages remain ‘well-anchored’.

This means that as productivity and output increases, those gains in real consumption necessarily flow upward.

As the populist administration ironically moves to support investors and the financial sector at the expense of those working productively for a living.

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Looks to me like the theory that a large output gap/high unemployment will control ‘inflation’ (for anything more than the very short term) is about to fall by the wayside, just like the theory that a small output gap would cause higher inflation fell by the wayside in the late 90′s.

UK Inflation Rate Unexpectedly Rose in February

by Svenja O’Donnell

Mar 24 (Bloomberg) — The U.K. inflation rate unexpectedly rose in February after higher food costs and the weakness of the pound sustained price pressures even as Britain’s recession deepened.

Consumer prices rose 3.2 percent from a year earlier, the Office for National Statistics said today in London. The median forecast of 28 economists was for 2.6 percent. Officials said that Bank of England Governor Mervyn King will explain the increase in a letter to the government today after the rate breached its 3 percent upper limit.

“We’ve got such huge spare capacity in the economy,” James Knightley, an economist at ING Financial Markets in London. “Inflation pressures are going to be very weak indeed in the months to come. The process will continue through this year and into the next.”

Maybe.

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The FDIC has a legal responsibility to take over insolvent banks.

They have aggressively done that, including taking over WAMU for liquidity concerns when it was legally solvent.

I view that as overly aggressive, as the banking model includes FDIC insured deposits for the further purpose of not using the liability side of banking as the place for market discipline. And, in fact, legal action vs the FDIC’s response to WAMU’s liquidity issues is not in progress.

So what may have happened subsequently in the case of the major banks getting government capital may have been something like this:

Phone call:

Shiela: Hi Barry, just a head’s up. A couple of major banks are up for exam, and if they don’t pass I’m legally bound to shut them down.

President: We don’t want that to happen, is there anything we can do?

Shiela: Well, you could increase their capital to levels where you can be sure they are legally viable.

Presidents: Thanks!

Next phone call:

President: Hi Ken. We need to get you enough capital right away to make sure you are legally solvent for the coming FDIC exam.

Ken: We are solvent, Barry, we don’t need any capital, but thanks for your concern and the kind offer!

President: Sorry, but we can’t take the chance the FDIC might decide to mark something down, declare some asset impaired, or otherwise cause your capital to fall under the legal minimum and declare you insolvent.

Ken: Ok, whatever you say, but again, we don’t want it or need it. So let me ask one favor- make sure we are allowed to give it back as soon as you feel it’s no longer in the national interest for us to keep it.

President: Thanks!

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Ridiculous, of course, but they are playing the ignorance of our leadership for all its worth. They know we don’t know it’s a bluff, and they have us on the defensive.

That’s what happens with leadership that doesn’t understand its own monetary system, and that we don’t need them or anyone else as buyers of our securities to fund our expenditures.

China calls for new reserve currency

by Jamil Anderlini

Mar 23 (FT) — China’s central bank on Monday proposed replacing the US dollar as the international reserve currency with a new global system controlled by the International Monetary Fund.

In an essay posted on the People’s Bank of China’s website, Zhou Xiaochuan, the central bank’s governor, said the goal would be to create a reserve currency “that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies”.

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Thanks- more evidence it all could be turning the corner.

New Supply of ‘jumbo’ financing in pipeline

by Kenneth R. Harney

Mar 22 (LA Times) — LA Times says jumbo mortgage financing to increase – major banks are about to ramp up financing availability into the jumbo mortgage market, not to then securitize the loans but to keep on their own books. The market has been starved for financing since the onset of the credit crunch in ’07. BAC is one of the lenders rolling out a large financing program for jumbos.

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• ICSC UBS Store Sales YoY (Released 7:45 EST)
• ICSC UBS Store Sales WoW (Released 7:45 EST)
• Redbook Store Sales Weekly YoY (Released 8:55 EST)
• Redbook Store Sales MoM (Released 8:55 EST)
• ICSC UBS Redbook Comparison TABLE (Released 8:55 EST)
• House Price Index MoM (Released 10:00 EST)
• House Price Index YoY (Released 10:00 EST)
• House Price Index ALLX (Released 10:00 EST)
• Richmond Fed Manufacturing Survey (Released 10:00 EST)
• Richmond Fed Manufacturing Survey ALLX (Released 10:00 EST)

ICSC UBS Store Sales YoY (Mar 24)

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ICSC UBS Store Sales WoW (Mar 24)

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Redbook Store Sales Weekly YoY (Mar 24)

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Redbook Store Sales MoM (Mar 24)

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ICSC UBS Redbook Comparison TABLE (Mar 24)

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House Price Index MoM (Jan)

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House Price Index YoY (Jan)

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House Price Index ALLX (Jan)

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Richmond Fed Manufacturing Survey (Mar)

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Richmond Fed Manufacturing Survey ALLX (Mar)

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Typical biased reporting. The fall in price from last year is emphasized while the increase from last month isn’t even mentioned.

Existing Home Sales Rebound, but Prices Plunge

by Jeff Bater

Mar 23 (WSJ) — Existing-home sales rebounded in February, climbing above expectations, but prices plunged again.

Home resales climbed to a 4.72 million annual rate, a 5.1% increase from January’s unrevised 4.49 million annual pace, the National Association of Realtors said Monday.

Foreclosures and short sales reflect about 45% of total existing-home sales. Distressed properties are discounted, so the abundance of these sales prices new homes out of the market, discouraging construction and weakening the overall housing sector further.

With so many distressed sales, the median price for an existing home fell last month. At $165,400 in February, the median price was down 15.5% from $195,800 in February 2008. The median price in January this year was $164,800. The 15.5% plunge is the second biggest ever, behind January’s 17.5% drop.

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This says it all.

And only days after Bernanke explained how government spends by changing numbers in accounts.

Obama is either ignorant or subversive:

From 60 minutes last night:

Obama on 60 minutes

Mar 22 (CBS) —

KROFT: Is there some limit to the amount of money we can spend?

OBAMA: Yes.

KROFT: Or print trying to solve this crisis?

OBAMA: There is.

KROFT: And are we getting close to it?

OBAMA: The limit is our ability to finance these expenditures through borrowing. And the United States is fortunate that it has the largest, most stable economic and political system around. And so the dollar is still strong because people are still buying treasury bills. They still think that’s the safest investment out there. If we don’t get a handle on this, and also start looking at our long-term deficit projections, at a certain point, people will stop buying those treasury bills.

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Clever, those Chinese. Now they get to keep their currency down to support their exports while claiming they are acting altruistically to support Obama.

Fortunately for us this keeps the imports flowing our way and supports our standard of living.

I don’t think we did this by design, but instead it falls under better lucky than good.

China to Keep Buying Treasuries, Top Official Says

by Dune Lawrence and Kevin Hamlin

Mar 23 (Bloomberg) — China’s top foreign-exchange official said the nation will keep buying Treasuries and endorsed the dollar’s global role, supporting the U.S. as the Obama administration increases spending to revive growth.

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Trichet on funding the national governments

When asked specifically if there are any obstacles to the ECB purchasing government assets, Mr Trichet reiterated that the ECB “are not pre-committed for any new decisions”, while his comments suggest the issue of risk-sharing and fiscal indemnity remains an important consideration: “One element which has to be taken into account is that the risks of the central banks and the risks of the governments are, in the euro area, clearly separated without combination of risks or blending of responsibilities”.

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AKA, “Beggar Thy Neighbor” policy straight from the book.

SNB’s Jordan says Franc Can’t be Allowed to Strengthen Further

by Dermot Doherty

Mar 22 (Bloomberg) — The Swiss franc can’t be allowed to appreciate further as “excessive” strength would put Switzerland’s export industry at a “disadvantage” and threaten the country with higher unemployment, Sonntag reported, citing Swiss National Bank board member Thomas Jordan.

The SNB’s decision this month to purchase corporate bonds is aimed at reducing the risk premium by narrowing the spreads on such debt instruments, Jordan said in an interview in today’s
newspaper.

“We are facing a severe recession” and need to be “unconventional” in dealing with it, Jordan said. The SNB will expand the money supply “as strongly as is needed” to prevent deflation, according to the newspaper.

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(email exchange)

Thanks!

In case you thought the new head of the CBO understands the way the monetary system works…

>   
>   On Sat, Mar 21, 2009 at 1:37 AM, Scott wrote:
>   
>   FYI . . . from page 43 of CBO’s 10-year projections published
>   today…influence of CBO’s new head Doug Elmendorf (co-author a few
>   years ago of a widely cited paper on the effects of deficits on interest
>   rates) is pretty clear . . . .
>   
>   ”Capital accumulation is affected because the increase in government
>   debt is expected to displace, or “crowd out,” a smaller amount of private
>   capital.
>   

There is no such thing.

>   
>   That result occurs because the reduction in overall national saving
>   dampens spending on business fixed investment and the construction of
>   housing.
>   

Non-sensical rhetoric. ‘National savings’ as he is using the term is a relic from the gold standard when there were hard supply side constraints on reserves.

>   
>   Although the size of such displacement is very uncertain,
>   

Yes, in fact it doesn’t exist.

>   
>   CBO assumes that, in the long run, each dollar of additional federal debt
>   crowds out about a third of a dollar’s worth of private domestic capital
>   (with the remainder of the rise in debt offset by increases in private
>   saving and inflows of foreign capital).”
>   

Ridiculous empty rhetoric from yet another deficit terrorist.

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Congressional testimony from Mr. Liddy, the AIG CEO:

Liddy testimony

Mar 18 (CNN) —

KANJORSKI: Thank you very much, Mr. Liddy.

I guess my first question is, you’ve just announced that some of your members or employees that received those bonuses after Saturday this week have agreed to return it. Why couldn’t that have been negotiated for the last two months? And why couldn’t that information have been made available to both this committee, to the secretary of the treasury, and to the chairman of the Federal Reserve?

These are the allegations that have made AIG subject to the wrath of the media, the administration, and the ‘American public’.

LIDDY: I think there’s two parts to that question, sir. Let me see if I can address them in turn.

We’ve been working on this issue of what to do with these retention payments. We’ve made the information publicly available in our various 10-K filings and 8-Ks and (INAUDIBLE). The decision we made — I made — was as much one of risk assessment as it was blindly following legal advice. The risk assessment was we’ve made great progress in winding down this business, but there is still $1.6 trillion of stuff in that portfolio.

There’s risk that that could blow up. And if it were to explode, it can cause irreparable damage to that progress that we’ve already made.

KANJORSKI: Necessitating, Mr. Liddy, a further investment of the American taxpayers in (INAUDIBLE) with equity if we were to keep you solvent.

LIDDY: Would you repeat that, sir?

KANJORSKI: The risk is if those assets deteriorate or blow up, you would either go into total destruction or have to come back to the United States government and this Congress for additional funds.

LIDDY: Yes. I think that’s exactly correct, sir.

So the judgment that we made, in cooperation with the Federal Reserve — we treat the Federal Reserve as our very important partners. The decision we made was that we could preserve that unit and continue to wind it down in a very orderly fashion and not expose the taxpayer and the company for the risks that, heretofore, they’ve been exposed to.

I know $165 million is a very large number. It’s a very large number. In the context of $1.6 trillion and the money that’s already been invested in us, we thought that was a good trade.

KANJORSKI:Am I to understand you’re saying that Chairman Bernanke or his designated person at the Federal Reserve was informed that you were going to make these payments and acquiesced in that decision?

LIDDY:Yes. Everything we do, we do in the partnership with the Federal Reserve. The Federal Reserve is at our board meetings, at our compensation committee meetings, at our various meetings on strategy. And they have the ability to weigh in either yea or nay on anything that we decide.

So why hasn’t all that venom been redirected to the Fed?

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In line with recent equity price actions as the Obamaboom takes shape due to the automatic stabilizers, and soon to be enhanced by the fiscal adjustments.

• IG On-the-run Spreads (Released 5:02 EST)
• IG6 Spreads (Released 5:02 EST)
• IG7 Spreads (Released 5:02 EST)
• IG8 Spreads (Released 5:02 EST)
• IG9 Spreads (Released 5:02 EST)

IG On-the-run Spreads (Mar 23)

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IG6 Spreads (Mar 23)

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IG7 Spreads (Mar 23)

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IG8 Spreads (Mar 23)

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IG9 Spreads (Mar 23)

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• Existing Home Sales (Released 10:00 EST)
• Existing Home Sales MoM (Released 10:00 EST)
• Existing Home Sales YoY (Released 10:00 EST)
• Existing Home Sales Inventory (Released 10:00 EST)
• Existing Home Sales ALLX 1 (Released 10:00 EST)
• Existing Home Sales ALLX 2 (Released 10:00 EST)
• Existing Home Sales TABLE 1 (Released 10:00 EST)
• Existing Home Sales TABLE 2 (Released 10:00 EST)

Existing Home Sales (Feb)

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Existing Home Sales MoM (Feb)

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Existing Home Sales YoY (Feb)

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Existing Home Sales Inventory (Feb)

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Existing Home Sales ALLX 1 (Feb)

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Existing Home Sales ALLX 2 (Feb)

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Existing Home Sales TABLE 1 (Feb)

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Existing Home Sales TABLE 2 (Feb)

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WB started twittering. Check it out sometime!

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Fed USD swap lines outstanding increased $15.7 billion to $329.6 billion last week.

Not good! It’s only one week’s data, but the Fed doesn’t want to see this moving up.

They recently extended the lines from April to October, and likely realize there is no way
they can let the outstanding loans mature and demand payment without market disruptions that would make the rest of the financial crisis look like child’s play.

And if the rest of the world catches on to the notion that the Fed can’t call these loans without serious market disruptions, market forces will cause the lines to expand continuously and only stop when the Fed finally does call a halt either on their own or via Congressional order.

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Interesting the legendary Swiss National Bank doesn’t yet understand it’s own monetary system.

Seems their understanding has yet to move beyond the days of the gold standard.

SNB Moves Are Defense Against Deflation, Jordan Says

by Simone Meier

Mar 19 (Bloomberg) — Swiss central bank Governing Board member Thomas Jordan comments on the economic outlook, the SNB’s use of unconventional policy tools and deflation risks. He made the remarks in a speech in Zurich today.

On currency measures:

“From the SNB’s point of view, the current currency-market measures are serving as an insurance against the threat of an unwelcome strong appreciation of the franc. At the same time, they’re serving as defense against deflation.”

Yes, the ‘deflation’ from lower costs of falling export prices that drive down domestic wages, profitability, and asset prices.

“The SNB’s currency purchases don’t have anything to do with a ‘beggar thy neighbor’ policy and must not be interpreted as the beginning of a currency war. It’s not about Switzerland creating advantages with a weak franc.”

He can call it whatever he wants. Functionally it’s a policy to keep their currency weak enough to keep export prices from falling. ‘Beggar thy neighbor’ is not a matter of degree. It means leaning on your neighbors domestic demand for your own employment purposes.

This is what happens when those running a government don’t understand how their non convertible currency works.

“Our purchases on the currency market are only to be seen as an additional instrument in times of zero-rate policy to fight the deflation threat.”

Call it what you want, mate. It’s a dead on beggar thy neighbor policy by ‘previous’ definition.

On unconventional tools:

“The use of unconventional measures doesn’t go without risks. On one hand, effects and side effects aren’t as well known as those of the conventional monetary policy.

First, they are highly unsure of the effects of ‘conventional monetary policy’ as per their own econometric research and theory.

Second, the effects of ‘unconventional measures’ are not only not well known, they are not understood at all.

Ironically, however, they are easier to understand, they alter the term structure of rates and remove interest income from the non government sectors.

And selling your currency to buy FX is an inflationary bias that drives down your currency and increases local currency prices of imports and exports.

On the other hand, it’s an intentional over-supply of the economy with liquidity.

Whatever that means in this context. Close questioning of what this means operationally reveals it’s empty rhetoric, all based on the backwards notion that the banking system needs reserves to be able to make loans.

There needs to be an immediate exit of unconventional measures once the monetary stimulus can be reduced. The assessment of the current crisis means that the SNB has to take these risks.”

There are no such risks. They don’t know how their own monetary system works.

The SNB “has to already engage itself with the question of a timely exit of these measures, however. Even with all uncertainty in forecasts, there’s certainty that there will be quieter times in the future. The exit of unconventional measures has to immediately happen once the monetary stimulus can be reduced. That’s the case when tensions on money and credit markets are over and inflation risks are increasing along with an economic recovery.”

“The dosage of monetary policy isn’t easy in the current environment. The assessment of current risks is clearly in favor of rather too much monetary stimulus than too little.”

The SNB is “confident” it will be able “reduce liquidity” when the time comes.

This is all non-sensical.

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7DIF of Economic Policy (Mar 16)

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