Talk is cheap about getting out of dollars— they are pushing those exports which means they will do what it takes to keep their currency down including selling it vs dollars.
Good for us, bad for them, but we don’t know it and they don’t know it.
China Raises Export Rebates on Steel, Machinery, Toys
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They don’t like to buy dollars but they don’t want their currencies to appreciate and risk export market share.
And Bernanke, Geithner, and Obama want them to let their currencies appreciate to help our exports and ALSO want them to buy dollars and treasury securities because they think we need that to fund our deficit spending.
It is one confused and sorry state of affairs on our part.
On balance it looks like our exports won’t be going up nearly as fast as imports especially with crude prices higher. And a good chunk of domestic demand will be channeled towards imports (including those new fiats…). And with flattish GDP and rising unemployment and talk of spending cuts and tax increases it’s starting to look very grim again.
Not to mention no plan to cut imported energy bills anytime soon.
BRICs Add $60 Billion Reserves as Zhou Derides Dollar
by Shanthy Nambiar and Lilian Karunungan
June 8 (Bloomberg) — Reserves Reversal
Asian central banks, excluding China, ran down foreign-
exchange reserves by more than $300 billion in the 12 months
ended April 30, according to London-based HSBC Holdings Plc.
Russia’s slid by $213 billion in the eight months ended March 31,
central bank data show. Brazil’s reserves dropped $5.7 billion
in the six months ended Feb. 27.
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What seems to be happening is bank ‘funding needs’ are become funding needs of Germany itself.
While this adds to Germany’s funding pressures, this process can go on indefinitely unless/until germany cannot somehow fund itself.
Not long ago the finance ministers announced they had a contingency plan for that possibility but wouldn’t say what that plan was leaving open the possibility they were bluffing. The CDS markets could be the best leading indicators of real trouble. With the US ‘recovery’ hitting a ‘soft patch’ of very low and very flat gdp and unemployment rising with productivity gains, an export dependent Eurozone looks like it will continue to struggle.
It just dawned on me that the Bush recovery got help from the fraudulent sub prime lending while it lasted, as the Clinton expansion got an assist from the pie in the sky valuations of the dot com boom, as the Reagan boom was assisted by the fraudulent S and L lending while that lasted. Without that kind of supplemental dose of aggregate demand, the automatic stabilizers alone while braking the decline probably do not produce all that robust of a recovery.
And if we follow the lead of Japan and tighten fiscal with every green shoot we wind up with the same results.
DJ WestLB Was Close To Being Shut Down Over Weekend
June 8 (Dow Jones) — German state-controlled bank WestLB AG was
close to being shut down over the weekend, people familiar with the
situation told Dow Jones Newswires Monday.
Bundesbank President Axel Weber and President of Germany’s BaFin
financial regulator Jochen Sanio threatened to close down the state bank
at crisis talks held over the weekend, the people familiar with the
talks said. It was only after this threat that savings banks agreed to
raise the guarantee framework for the debt-laden bank, the people said.
Late Sunday, WestLB owners said they raised their guarantee
framework for the bank by another EUR4 billion. The people familiar with
the situation said the savings bank agreed to extend the guarantee
umbrella after it was ensured that a solution wouldn’t hamper the spin
off of toxic assets into a so-called “bad”
German bank.
Regional banking associations WLSGV and RSGV together hold more than
50% of the shares, while the state of North Rhine-Westphalia has a 17.5%
stake and NRW.BANK holds 31.1%. NRW.BANK’s owners are the state of North
Rhine-Westphalia with 64.7% and WLSGV and RSGV with 17.6% each.
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With productivity up more than expected Q2 GDP can be flat with hours declining.
Karim writes:
Details:
Good News
Bad News
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The ECB remains way ahead of the fed regarding monetary operations.
It has been setting rates and letting quantity adjust and now addresses
unfounded concerns of ‘exit strategies’ head on.
(I take issue only to the extent of the potential inflationary implications and influence on growth and employment of interest rate policy in general, but that’s another story.)
The covered bond purchase could have utilized a rate target rather than a quantity target but their policy might not be to target a specific rate.
Also note they accept collateral down to a bbb rating from their member banks, which is includes bank paper and is functionally very close to unsecured lending- a policy that i have been suggesting would have served the fed well from the beginning of the crisis.
Trichet Sees Automatic Exit From ECB’s Non-Standard Measures
June 5 (Bloomberg) — European Central Bank President Jean- Claude Trichet said banks will seek less credit from the ECB when the economy improves, automatically reducing the amount of money in the system and ensuring a non-inflationary recovery.
By concentrating its non-standard policy measures on the supply of unlimited liquidity to banks, the ECB has ensured it has “an in-built exit strategy,†Trichet said in a speech in Warsaw today. “That is, when tensions in financial markets ease, banks will automatically seek less credit from the ECB.
This will be a decisive element in ensuring a non-inflationary recovery.â€
The Frankfurt-based ECB, which has cut its benchmark interest rate to a record low of 1 percent, has said it will loan banks as much money as they need for up to 12 months and pledged to buy 60 billion euros ($85 billion) of covered bonds in an effort to revive lending. The ECB yesterday lowered its economic forecasts for this year and next. It now expects the economy of the 16 nations using the euro to shrink by about 4.6 percent this year before returning to positive quarterly growth rates by mid-2010.
“Once the macroeconomic environment improves, the Governing Council will ensure that the measures taken can be quickly unwound and the liquidity provided absorbed,†Trichet said. “Hence, any threat to price stability over the medium and longer term will be effectively countered in a timely fashion.â€
Merkel’s Warning
German Chancellor Angela Merkel on June 2 scolded the Federal Reserve and Bank of England for pumping too much money into their economies and said that by deciding to buy covered bonds, the ECB had “bowed somewhat to international pressure.â€
She urged a return to a “policy of reason.â€
Trichet said the ECB’s “bold yet solidly-anchored response†to the worst economic crisis since World War II is “encouraging.†While long-term inflation expectations remain anchored around the ECB’s 2 percent limit, “our measures show some signs of revival in the functioning of money markets in Europe,†he said.
Trichet added that the crisis has not altered the ECB’s primary objective of maintaining price stability. “This objective will always provide the context and limits within which our course of action is framed and enacted.â€
Trichet Says ECB Will Buy Covered Bonds Next Month
by Neil Unmack
June 4 (Bloomberg) — The European Central Bank will start buying 60 billion euros ($85 billion) of three- to 10-year covered bonds from July, President Jean-Claude Trichet said.The central bank will buy bonds rated at least BBB- in the primary and secondary markets until June 2010, but doesn’t plan to purchase other assets, the ECB said after policy makers held interest rates at a record-low 1 percent. The ECB said on May 7 it will buy covered bonds in a bid to revive the market, which lenders use to finance mortgages and public-sector loans.
Covered bond issuance increased after the ECB announced the purchase program last month, with banks selling 26.8 billion euros of the debt, according to data compiled by Bloomberg. The $2.8 trillion market had been roiled by the credit crisis, and sales had halved to 48.6 billion euros by May 7, compared with 99.4 billion euros in the same period a year earlier.
“It’s supportive for the primary and secondary covered bond market,†said Leef Dierks, a credit analyst at Barclays Capital in Frankfurt. “We expect the issuance window to remain open, and believe that the positive momentum in the secondary market will continue.â€
To be included in the ECB’s purchase plan, covered bonds “must be eligible for use as collateral in the euro system’s credit operations,†Trichet said. The bonds must “have as a rule a volume of about 500 million euros or more and in any case not lower than 100 million euros,†he said.
Bond Eligibility
Bonds bought by the central bank must comply with the so- called UCITS directive, a European regulatory framework for mutual funds, or have “similar safeguards,†Trichet said, without being more specific.
“They want to get the most bang for their euro, and that means helping the bonds that will have the widest investor support in the market,†said Ted Lord, head of covered bonds at Barclays.
The ECB said it will buy bonds through “direct purchases†rather than following the Bank of England’s example of using auctions.
“We would like more clarity on how these direct purchases will work,†said Heiko Langer, a covered bond analyst at BNP Paribas SA in London. “Will we know how much they have bought, what they have bought, and at what price?â€
Regarding the euro region’s economy, Trichet said confidence may improve more quickly than has been forecast.
“Risks to the economic outlook are balanced,†he said. “On the positive side†there are “stronger-than-anticipated effects from stimulus measures underway and other policy measures taken. Annual inflation rates are projected to decline further and become negative over the coming months.â€
Covered bonds are backed by real-estate or public-sector debt and tend to have a higher rating than straight corporate bonds because they’re also supported by a borrower’s pledge to pay.
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Interesting focus on FX from both ECB and BOC this morning:
From BOC:
–In recent weeks, financial conditions and commodity prices have improved significantly, and consumer and business confidence
have recovered modestly. If the unprecedentedly rapid rise in the Canadian dollar (which reflects a combination of higher
commodity prices and generalized weakness in the U.S. currency) proves persistent, it could fully offset these positive factors.
–Key is term ‘unprecedented’ and that rise in C$ is not fully explained by the rise in commodity prices.
From ECB:
–ECB staff updated its forecasts for growth and inflation. Main change was in 2009 growth forecast:
Now -4.1% to -5.1% from estimates of -2.2% to -3.2% in March
Trichet stated: “its very important u.s. repeats strong dollar policyâ€.
The Euro is not trading far from levels that Trichet described as ‘brutal’ in the past.
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Raise taxes with unemployment rising due to a shortage in aggregate demand?
Just in case you thought the great marketer understood the monetary system:
Pimco’s Gross: Maybe Obama Should RAISE Taxes
By: JeeYeon Park
June 3 (CNBC) — Inflation is likely three to five years down the road, and investors should stay relatively close to the front end of the yield curve where the bond prices are protected by the Fed position of low Fed funds and interest rates, said Bill Gross, co-CIO and founder of Pimco.
“Further out on the curve, anticipate deterioration in inflation, a deterioration possibility in terms of the dollar, which will produce negative returns for those long-dated securities,†Gross told CNBC.
Gross said the recovery is being driven by a $2 trillion annualized deficit. To take its place in the economy would require at least $1 trillion increase in consumption and investment, which would be quite challenging as baby boomers and consumers become more thrifty.
He also said the Obama administration should cut back on inefficient defense programs — and consider raising taxes.
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Karim writes:
Doesn’t break a lot of new ground. Forecasts appears consistent with prior statements and still casts financial markets in a fragile light despite recent run-up in equities. Makes no mention of upping asset purchases and issues longer-term fiscal warning:
*The most recent information on the labor market–the number of new and continuing claims for unemployment insurance through late May–suggests that sizable job losses and further increases in unemployment are likely over the next few months.
Agreed. And unemployment continues to increase until GDP growth outpaces productivity gains.
*Recent data also suggest that the pace of economic contraction may be slowing.
*Nonetheless, a number of factors are likely to continue to weigh on consumer spending, among them the weak labor market, the declines in equity and housing wealth that households have experienced over the past two years, and still-tight credit conditions.
*We continue to expect overall economic activity to bottom out, and then to turn up later this year.
Agreed. Deficit spending is not large enough to support aggregate demand and savings desires at levels that equate to modest GDP growth
*Even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, implying that the current slack in resource utilization will increase further.
Agreed. And weak overseas economies both limit export growth and bode for increased imports.
And higher crude and product prices raise nominal imports and dampen us domestic demand.
Also, state and local govt are also just now engaging in cutbacks and tax increases.
*Financial markets and financial institutions remain under stress, and low asset prices and tight credit conditions continue to restrain economic activity.
Yes, this allows lower taxes and/or higher government spending to support aggregate demand. Unfortunately, the noises from the administration are moving in the other direction, with President Obama’s latest statement that the US has ‘run out of money.’
*Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.
I do not agree. In my book fiscal responsibility means supporting demand at desired levels of output and employment.
Financial sustainability is not an issue with non convertible currency and floating exchange rate policy, as it was when on the pre 1934 gold standard..
Non-Mfg ISM up from 43.7 to 44 but details weaker.
This indicates the slowing in the rate of decline is slowing, supporting the forecasts of nominal GDP hovering near 0 and unemployment continuing to rise.
There could be a rethinking of the output gap and an upward adjustment of the ‘neutral rate of unemployment if CPI continues to rise.
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As another associate quipped after reading Bernanke’s statements:
‘We are all deficit terrorists now!’
From Mike Norman who’s getting very good at this:
Mike Norman Economics
New entries on my blog today (Wednesday, May 3, 2009).
Bernanke hasn’t a clue!!Bernanke warns on deficits as Treasury rates rise
Add Ben to the list of people who don’t understand our monetary system!
Bernanke warns on deficits as Treasury rates rise: Part II
Someone ought to tell Bernanke that the Fed sets rates. PERIOD!! END OF STORY!!!
Bernanke: start work now to curb US budget deficit
Curb the budget, reduce private sector savings. The relationship’s an identity, Ben!
I hope you enjoyed this market rally over the past three months because if the Administration follows Bernanke’s advice–and it’s likely that they will-kiss the rally goodbye and say, “Hello,” to new lows in the market sometime later this year or next year. Depends on when and how fast they “curb the deficit.”
-Mike Norman
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> Karim writes:
> Surprising comments show political difficulties of QE in Europe. With fiscal policy constrained
> and the Euro strong, that means more pressure on ‘conventional’ monetary policy: ECB to
> keep o/n rate low for long.
Yes, agreed. Shows no understanding of monetary operations whatsoever.
With the old German model they had tight fiscal to keep domestic demand and costs down to drive exports. And they also bought $US to keep the mark at ‘competitive’ levels.
With the euro they are also keeping fiscal relatively tight to keep a lid on domestic demand and costs to drive exports, but can’t buy $US for ideological reasons (that would look like the euro is backed by dollars, etc.) so instead of exports rising the currency appreciates to levels where exports remain stagnant.
Merkel attacks central banks
by Bertrand Benoit and Ralph Atkins
June 2(FT) —Angela Merkel, the German chancellor, criticised the world’s main central banks in surprisingly strong terms on Tuesday, suggesting that their unconventional monetary policies could fuel rather than defuse the economic crisis.
The attack on the US Federal Reserve, the Bank of England and the European Central Bank is remarkable coming from a leader who had so far scrupulously adhered to her country’s tradition on never commenting on monetary policy.
“What other central banks have been doing must stop now. I am very sceptical about the extent of the Fed’s actions and the way the Bank of England has carved its own little line in Europe,†she told a conference in Berlin.
“Even the European Central Bank has somewhat bowed to international pressure with its purchase of covered bonds,†she said. “We must return to independent and sensible monetary policies, otherwise we will be back to where we are now in 10 years’ time.â€
Ms Merkel’s decision to ignore one of the cardinal rules of German politics – an unwritten ban on commenting monetary policy out of respect from central bank independence – suggests Berlin is far more concerned about the route taken by the ECB than had hitherto transpired.
Berlin is concerned that the central banks will struggle to re-absorb the vast amount of liquidity they are pouring into the markets and about the long-term inflationary potential of hyper-lose monetary policies.
The ECB’s efforts have been focused on pumping unlimited liquidity into the eurozone banking system for increasingly long periods. But last month (May), it followed the US Federal Reserve and Bank of England in announcing an asset purchase programme to help a return to more normal market conditions.
The ECB announced it had agreed in principle to buy €60bn in “covered bondsâ€, which are issued by banks and backed by public sector loans or mortgages.
The covered bond purchases, however, were only agreed after extensive discussions within the 22-strong ECB governing council. According to one version of May’s meeting, the council had discussed a €125bn asset purchase programme that would also have included other private sector assets, but only the purchase of covered bonds was agreed.
Axel Weber, ECB council member and president of Germany’s Bundesbank, has been among those who expressed scepticism about direct intervention in financial markets. In a Financial Times interview in April he expressed “a clear preference for continuing to focus our attention on the bank financing channelâ€.
Mr Weber has also been among the most proactive council members in warning that the monetary stimulus injected into the economy will have to be reduced or even reverse quickly once the economic situation improves.
Details of the covered bond purchase scheme will be unveiled by the ECB after its meeting on Thursday. One likely solution is that the package will be split according to eurozone countries’ capital shares in the ECB, which would result in Germany accounting for about 25 per cent of the €60bn programme. Meanwhile, the ECB is widely expected to leave its main interest rate unchanged at 1 per cent, its lowest ever.
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