cash for clunkers may cost govt. up to $45,354 per vehicle


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(short version)

“Cash for Clunkers” Program May Cost $45,354 per vehicle

By Avery Goodman

(Seeking Alpha) — The “Cash for Clunkers” program has been a “great success”, at least according to the government, and the auto industry. Within days of its kickoff, all $1 billion allocated to the program has been used up by Americans who have eagerly lined up to trade their clunkers for new vehicles.

Some refreshingly honest reporting has come from Edmunds.com, a car buying site that is telling the truth, in spite of benefiting from an increase in business and site traffic, due to the program. According to Edmunds, about 200,000 old low mileage cars would normally traded in, every 3 months, in exchange for more efficient higher mileage cars, without this program.

The highest rebate is $4,500, and the lowest is $3,500. If everyone qualified for $4,500 per vehicle, about 222,000 vehicles would have just taken advantage of the government’s money. At $3,500, 286,000 vehicles will have been sold.

I assume that, given all the raving, the government will eventually get around to assigning more money. It will take at least 2 or 3 months for the legislation to work its way through Congress. Meanwhile, if all buyers have qualified for the higher $4,500 rebate, the “cash for clunkers” program will mean a marginal increase in car sales of 22,000 this quarter. $1 billion divided by 22,000 means a net cost to the government of $45,354 per car.

If all buyers only qualify for the $3,500 rebate, it means a marginal increase in sales of about 86,000, or a net cost to the taxpayers of $11,628 per vehicle. In all likelihood, however, there will probably be a mix of vehicles qualifying for various rebates between $3,500 and $4,500. Based upon that assumption, Edmunds.com estimates that the average cost to the taxpayer will be about $20,000 per vehicle.

Even most of the marginally extra sales really represent people who were going to buy a new car eventually anyway. They are just buying a bit sooner than they expected. Old clunkers don’t last forever, and they are almost all eventually replaced. The government is shifting tomorrow’s demand to today, stealing from tomorrow to pay for today, but at great cost to the taxpayer.


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GDP/ECI


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Karim writes:

Most important info in the report is the benchmark revisions: The first year of the recession (Q4 2007-Q3 2008) was revised from -0.8% to -1.9%. This adds a full percentage point to the Fed’s output gap measure. Also, Q2 2009 negative print marks first time U.S. economy has had four consecutive quarters of negative growth since 1947.

Q4 2008 was revised from -6.4% to -5.5%; Q1 2009 from -5.4% to -6.3%

The weaker Q1 number (especially inventories) led to the Q2 inventory drag being less than expected (-0.8%) and hence Q2 being less negative than expected at -1%.

The other components of GDP were either in line or weaker than expected. All numbers below are annualized rate of change:

  • Private consumption: -1.2% vs 0.6%
  • Non-residential fixed investment: -8.9% vs -43.6%
  • Residential fixed-investment (housing): -29.3% vs -38.2%
  • Exports: -7% vs -29.9%
  • Govt: 5.6% vs -2.6%

ECI posts second lowest advance on record at 0.4% (after 0.3% prior quarter).


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SZ News: Leading Indicators Rise, Signaling Slump Is Abating


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Yes, seems to be world wide.

The combined global fiscal measures both pro active and ‘automatic’ seemed to have halted the slide.

Depressions are highly improbable with non convertible currency and floating fx policies.

Swiss Leading Indicators Rise, Signaling Slump Is Abating

By Klaus Wille
July 31 (Bloomberg) — Switzerland’s leading economic
indicators rose more than economists forecast in July, adding to
signs the worst economic slump in three decades is bottoming
out.

The KOF’s monthly aggregate of indicators that aims to
predict the economy’s direction about six months ahead increased
to minus 0.99 points from a revised minus 1.49 in June, the
Zurich-based research institute said today. Economists had
forecast that the index would rise to minus 1.45 from an
initially reported minus 1.65, based on the median of 13
estimates in a Bloomberg News survey.

Switzerland’s economy is moving toward a recovery after a
0.8 percent contraction in the first quarter, reports this month
showed. The UBS consumption indicator increased for the first
time in three months in June and the slump in manufacturing
eased. In the euro area, the biggest buyer of Swiss exports,
confidence in the economic outlook rose to an eight-month high.

“This figure is still low, meaning that Swiss gross
domestic product is likely to continue declining significantly
over the coming months relative to the previous year,” KOF said
in the statement. “However, the current barometer trend
indicates that the GDP growth rate should bottom out soon.”

The Swiss National Bank forecasts that the Alpine country’s
economy will shrink as much as 3 percent this year, which would
be the steepest decline since 1975.


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NY FED – Shadow Financial Market


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The findings add support to my proposal to ban banks from all secondary markets

Federal Reserve Bank of New York
Staff Reports
The Shadow Banking System:
Implications for Financial Regulation
Tobias Adrian
Hyun Song Shin
Staff Report no. 382
July 2009

This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in the paper are those of the authors and are not necessarily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

The Shadow Banking System: Implications for Financial Regulation
Tobias Adrian and Hyun Song Shin
Federal Reserve Bank of New York Staff Reports, no. 382
July 2009
JEL classification: G28, G18, K20

Abstract
The current financial crisis has highlighted the growing importance of the “shadow banking system,” which grew out of the securitization of assets and the integration of banking with capital market developments. This trend has been most pronounced in the United States, but it has had a profound influence on the global financial system. In a market-based financial system, banking and capital market developments are inseparable: Funding conditions are closely tied to fluctuations in the leverage of market-based financial intermediaries. Growth in the balance sheets of these intermediaries provides a sense of the availability of credit, while contractions of their balance sheets have tended to precede the onset of financial crises. Securitization was intended as a way to transfer credit risk to those better able to absorb losses, but instead it increased the fragility of the entire financial system by allowing banks and other intermediaries to “leverage up” by buying one another’s securities. In the new, post-crisis financial system, the role of securitization will likely be held in check by more stringent financial regulation and by the recognition that it is important to prevent excessive leverage and maturity mismatch, both of which can undermine financial stability.


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TIPS 5 year 5 years fwd

This used to be one of the Fed’s major concerns as they are steeped in inflation expectations theory.

It could still signal a need to keep a modestly positive ‘real rate’ though the large ‘output gap’ is telling them otherwise.

History says they’ll put most of the weight on the output gap, though a negative real rate is problematic for most FOMC members.

Should core inflation measures go negative, they will be a lot more comfortable with the current zero rate policy.

Interesting that the employment cost was just reported up 1.8% which shows how little it went down even in the face of
a massive rise in unemployment.

JN Daily | Jobless Rate Moves Higher, CPI drops, HHold Spending Misses Expectations


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Looks like China is starting to stabilize Japan, which means it is probably helping the eurozone some as well.

  • Shipments Up Across Industries In June As Production Recovers
  • Cost Cuts Help Electronics Firms Reduce Losses In April-June
  • Jobless Rate Hits 6-Year High Of 5.4% In June
  • Household Spending Rises 0.2% In June
  • June CPI Falls At Record Pace
  • Housing Starts Fall 32.4% In June
  • June Const Orders Fall 8th Straight Month
  • LDP Aims For Steady Growth, Hints At Sales Tax Hike In Platform
  • Forex: Dollar Trades In Y95 Range Ahead Of U.S. GDP Data
  • Stocks: End Up, Set New ’09 High As Earnings Shine
  • Bonds: End Lower On Nikkei Rise, Pre-Tender Hedge


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Excellent NY Fed staff report on qantitative easing


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This should be more than enough to dismiss concerns of reserves influencing lending, apart from price.

Hope they do a full public relations effort on this.

A touch weak on fully dismissing the ‘money multiplier’ but certainly 99% ‘there:’

NY Fed Staff report:

“The general idea here should be clear: while an individual bank may be able to decrease the level of reserves it holds by lending to firms and/or households, the same is not true of the banking system as a whole. No matter how many times the funds are lent out by the banks, used for purchases, etc., total reserves in the banking system do not change. The quantity of reserves is determined almost entirely by the central bank’s actions, and in no way reflect the lending behavior of banks.”


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NY Fed’s Dudley tees off on reserve-driven inflation view


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Dudley almost has it.

NY Fed’s Dudley tees off on reserve-driven inflation view

As Dudley notes, the fears of higher inflation expressed in that survey are likely being influenced by the Fed’s balance sheet expansion, which has of necessity increased excess reserves.

The argument that large amounts of excess reserves will fuel credit expansion and eventually inflation goes back to Karl Brunner’s formulation of the money multiplier hypothesis. According to this schema, holding excess reserves – which historically earned zero interest – would entail lost returns relative to holding earning assets. To avoid this cost, banks would seek to lend out excess reserves, thereby increasing credit, economic activity, and price pressures. As Dudley notes, this logic breaks down when reserves become earning assets, as they have since last fall when the Fed began paying interest on reserves.

He is wrong on that part. It does not matter if they are earning assets or not. In no case does reserve availability have anything to do with lending. It is about price, not quantity.

This counter-argument doesn’t excuse the Fed from responsibility for controlling inflation. The Fed still needs to set interest on excess reserves (IOER) rate consistent with a cost of capital that will promote price stability and sustainable growth. As Dudley points out, the IOER rate is effectively the same as the funds rate.

Just my theory, but seems to me they have this part backwards. The way I read it, it is lower interest rates that promote price stability.

In addition to the foregoing argument, Dudley also makes a novel and clever point

Hardly!!!

about the argument that excess reserves on bank balance sheets are ‘dry tinder:’ “Based on how monetary policy has been conducted for several decades, banks have always had the ability to expand credit whenever they like. They don’t need a pile of ‘dry tinder’ in the form of excess reserves to do so. That is because the Federal Reserves has committed itself to supply sufficient reserves to keep the fed funds rate at its target. If banks want to expand credit and that drives up the demand for reserves, the Fed automatically meets that demand in its conduct of monetary policy. In terms of the ability to expand credit rapidly, it makes no difference whether the banks have lots of excess reserves or not.”

Got that part right, except the Fed has no choice but to allow that to happen.

While the meat of Dudley’s talk centered on conceptual issues regarding bank reserves, he also made some remarks on the economy and policy. On the economy, Dudley sees recovery driven by three forces – fiscal stimulus, an inventory swing, and a rebound in housing and auto sales – but remaining subdued by historical standards for four reasons – a waning of support to personal incomes, ongoing adjustment to lower household wealth, weak structures investment, and a response to monetary policy easing that should be more constrained than in the past. Because the recovery is expected to be subdued, Dudley remarked that concern about when the Fed exits its very accommodative policy stance is “very premature.”

Here he still implies there are grounds for concern when in fact it is a non event.

Just as Dudley gave little indication that policy would be tightened anytime soon, he also reinforced the perception that an expansion of asset purchases is highly unlikely. He did so by noting that there are three costs to purchasing assets: a misperception of the intent of asset purchases that could increase inflation expectations,

He is still in the inflation expectations camp.

a reduction in bank leverage ratios from higher reserve balances which could slow credit growth,

Yes, as I have previously stated, quantitative easing is best understood as a bank tax.
Glad to see that aspect here.

and added interest rate risk on the Fed balance sheet.

Like I said above, he’s almost got it.


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EU Daily | ECB sees ‘turning point’ in lending conditions


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Yes, central banks have finally managed to restore a degree of ‘market functioning’ after full year or more of ‘extraordinary measures’ which mainly served to demonstrate a lack of understanding of basic monetary operations.

Note that only after automatic stabilizers began to reverse the slide at year end did the lending environment begin to recover as well.

  • ECB sees ‘turning point’ in lending conditions
  • European Retail Sales Fall for 14th Straight Month, PMI Shows 2009
  • German Unemployment Total Rose in July as Job Cuts Continued
  • German July Retail Sales Decline at Slowest Pace in 14 Months
  • Ifo Sees More Jobs Lost Among German Machinery Makers, FTD Says
  • French Retail Sales Post Sharpest Drop in Four Months, PMI Says
  • Italy’s Retail Sales Fall as Job Cuts, Recession Curb Spending
  • Italian Banks Agree on One-Year Loan Moratorium, MF Reports
  • Spanish Consumer Prices Dropped by Record 1.4 Percent in July
  • Spain’s Recession Eased in Second Quarter, Central Bank Says
  • German Bonds Decline as Stocks Advance, Italy Auctions Debt


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Geithner Pledges Smaller Deficit as China Talks Start


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Geithner Pledges Smaller Deficit as China Talks Start

By Rebecca Christie and Rob Delaney

July 27 (Bloomberg) — Treasury Secretary Timothy Geithner pledged the U.S. will shrink its budget deficit over the next four years and boost national savings,

Ah, ‘national savings,’ that gold standard measure that’s inapplicable with our non convertible dollar and floating fx policy.

Today it’s nothing more than another term for our trade balance.

‘National savings’ falls when the federal deficit rises and those funds thus created are held by non residents.
On a gold standard (or other fixed fx regime) that represented a gold outflow, as non residents were holding US currency that was convertible into gold on demand. And the gold supply was the national savings.

Anyone who uses that term in the context of non convertible currency is either ignorant or deliberately misleading.

and he called on China to maintain efforts to ease the impact of the global recession. “We are committed to taking measures to maintaining greater personal saving and to reducing the federal deficit to a sustainable level by 2013,” Geithner said in opening remarks for Strategic and Economic Dialogue meetings with Chinese officials in Washington.

Since total non government savings of financial assets equals federal deficit spending to the penny (it’s an accounting identity) cutting the deficit and increasing domestic savings can only be done by simultaneously reducing our trade deficit by exactly that much. That would likely mean importing a lot less from china.

So what his words are telling them is that the US is committed to buying less from them. That should give them a lot of comfort?

Geithner’s comments reinforced his efforts to reassure China, the largest foreign holder of American government debt, that this year’s record U.S. budget gap won’t pose a long-term danger. The shortfall is on course to reach $1.8 trillion in the year through September.

Geithner and Secretary of State Hillary Clinton are hosting Vice Premier Wang Qishan and Dai Bingguo, a state councilor, at the meetings today and tomorrow, the first such gathering since President Barack Obama took office.

Obama called for the two nations to deepen cooperation and work together to help the global economy. “As Americans save more and Chinese are able to spend more, we can put growth on a more sustainable foundation,” Obama said in his remarks. “Just as China has benefited from substantial investment and profitable exports, China can also be an enormous market for American goods.”

Wonderful, we work and produce goods and services for them to consume. That is called diminished real terms of trade and a reduced standard of living for the us.

Outside Investment

U.S. officials said last week they plan to raise concern
about China’s resistance to foreign investment at the talks,

China’s growing dollar reserves result mainly from foreign investment, where foreigners buy yuan with dollars so they spend the yuan in China on real investment (and maybe a bit of speculation).

while Chinese officials this year have highlighted their own worries about the value of their American investments.

Yes, and the play us for complete fools.

Geithner fielded a bevy of questions about the deficit during his June visit to Beijing. China’s holdings of U.S. Treasuries reached $801.5 billion in May, recording about a 100 percent increase on the level at the beginning of 2007, according to U.S. government figures.

“Recognizing that close cooperation between the United States and China is critical to the health of the global economy, we need to design a new framework to ensure sustainable and balanced global growth.”

No hint of what that ‘framework’ might actually be.

After seeing the ‘framework’ they’ve come up with for the US financial structure the odds of anything functionally constructive seem slim.

The Obama administration will take steps to put the U.S. on course for economic health, he said.

Like reducing the federal budget deficit when current steps have fallen far short of restoring aggregate demand?

Obama’s Goals

“The president also is committed to making the investments in clean energy, education and health care that will make our nation more productive and prosperous,” Geithner said. “Together these investments will ensure robust U.S. growth and a sustainable current account balance.”

Non look to add to aggregate demand in any meaningful way, especially with the associated tax increases.

And investement per se reduces standards of living. It’s only when that investment results in increased productivity for consumer goods and services is there an increase in our standard of living.

Geithner also repeated his call for China, which has posted record trade surpluses in recent years, to increase demand at home.

“China’s success in shifting the structure of the economy towards domestic-led growth, including a greater role for spending by China’s citizens, will be a huge contribution to more rapid, balanced, and sustained global growth,” Geithner said.

Just what we need, a billion non residents increasing their real consumption and competing with us for real resources.

In the talks today and tomorrow in Washington, U.S. officials said they plan to tell the Chinese the American rebound from a recession won’t be led as much by consumers as past recoveries.

That means our standard of living won’t be recovering even though GDP is recovering.

The American side also will urge China to rely more on household spending and less on exports for growth, an official told reporters in a July 23 press briefing in Washington.

Clearly the obama administration does not understand the monetary system and is working against actual public purpose.

The U.S. is concerned that there’s been a hardening of attitudes regarding China’s treatment of foreign investment, the official also said last week. China’s exchange-rate policy is another topic for discussion, the official said.

Total confusion on that front as well.

We push for a weak dollar/strong yuan policy so prices for China’s products at our department stores rise to the point we can’t afford to buy them.

Then we try to get them not to sell their dollar reserves because it might make the dollar go down.

From Mauer:

Hey, why don’t we all move to Latvia, where they do all of the stuff that Geithner advocates:

Latvia, which pegs its currency to the euro, now has a “strong”, stable currency. Good for them. They are sustaining this strong currency by crushing demand. Exports are down 28pc, but imports are down even more. The result of this Stone Age policy is economic contraction of 18pc this year, and 4pc in 2010.

But hey, you’ve got a “healthy” currency and a country which is pursuing a “sensible” fiscal policy with lots of belt tightening. And supposedly “building up national savings” as a consequence of these wonderful policies.

Where do we find these people?


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