Monthly Archives: July 2009

Drop in crude

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>   
>   (email exchange)
>   
>   Warren, Seems like we’ve seen a tiny repeat of what happened during
>   the ( Mosler coined) Mike Masters inventory liquidation last summer.
>   That is, crude oil drops and takes everything else down with it all driven
>   by the fear of increased scrutiny regulation on commodity speculation.
>   Do you agree? NY Times article a few days ago.
>   

Yes, also the fact that it’s done it for the last few years about this time gets the specs going in that direction as well. If there’s nothing ‘fundamental’ going on this year it could quickly reverse as Saudis hold price and let quantity adjust.

Also, lower crude makes dollars harder to get overseas (our oil bill goes down) which tends to firm up the dollar.


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Trade/Michigan

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Karim writes:

  • Trade improves both in balance and direction, likely benefitting from inventory restocking as goods balance improves much more than services balance
  • Exports up 1.6% and imports down 0.6%
  • Real trade balance narrows by 3.9bn; will likely boost Q2 GDP estimates by 0.25-0.50% (median estimate now -1.8%)
  • Import prices up 3.2%, 0.2% ex-petroleum and -0.1% from China (now -2.4% y/y)

  • Michigan survey much lower than expected (64.6 vs prior 70.8) and at lowest level since March
  • Consistent with other surveys (ABC, Conf Board)
  • Lower gas prices may help in weeks ahead but still strong headwinds from labor market


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swap lines

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Central bank liquidity swaps (13) 115,299 – 6,291

Fed advances to CB’s continues to fall

indicating foreign banks are increasingly able to borrow dollars in the market place.

If the remaining dollar loans to the ECB do become problematic,

it opens the door for the ECB to sell euro vs the dollar to pay down its loans.

It would do this if it wanted the euro weaker, perhaps to assist its exporters.

It would not be building dollar reserves, only paying down loans, so

there would be no ideological issue.


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ISM (non-Mfg)

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yes,

seems second quarter earnings should be better than expected and that costs are way down which will
add to profitability even with flattish sales.

and very wide net interest margins will support bank earnings growth even with low volume and continuing losses.

this can be a very good environment for stocks.


Karim writes:

Details a bit firmer than headline.

Overall, still contracting at a slower rate.



June May
Composite 47.0 44.0
Activity 49.8 42.4
Prices paid 53.7 46.9
New Orders 48.6 44.4
Employment 43.4 39.0
Export Orders 54.5 47.0
Imports 47.0 46.0

“Business has improved and holding steady.” (Arts, Entertainment & Recreation)

“Activity level is flat. Clients are delaying capital spending decisions.” (Professional, Scientific & Technical Services)

“Economy may be stabilizing. Second half looks more positive than first half.” (Information)

“Have begun spending government stimulus funding, and expect conditions to gradually improve in the near future.” (Public Administration)

“Occupancy levels continue to increase at a slow pace.” (Accommodation & Food Services)

“Activity is still slow and little has changed since last month.” (Wholesale Trade)


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savings rates, growth, and struggling green shoots

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So in the US the high savings rate is hurting growth, and in South Africa the low savings rate is hurting growth.

Next thing they’ll be saying is economies should not have a savings rate in order to have optimal output and employment…

Did I say they don’t understand the monetary system???!!!

And one reason the green shoots may be dying is the relentless monetary tightening as lower rates for savers,

quantitative easing as Central Banks accumulate higher yielding securities in exchange for reserve balances,

and lower interest paid by governments on their securities due to the lower rates

all contribute to removing interest income from world consumers.

South Africa’s Low Savings Threaten Growth, Nene Says

by Nasreen Seria

July 6(Bloomberg) — South Africa’s low savings rate is
crimping the country’s rate of sustainable economic growth,
Deputy Finance Minister Nhlanhla Nene said.

The low rate is also inflating the current account deficit,
making South Africa more reliant on foreign capital inflows,
Nene said in a speech to the South African Savings Institute in
Johannesburg today.

The rate of growth in consumer savings has been declining
since the first three months of 2006 after the central bank cut
interest rates to a 24-year low in 2005, spurring spending.
South Africa’s total savings rate is 17 percent of gross
domestic product, according to the quarterly bulletin of the
South African Reserve Bank.

“Persistently high current account deficits can lead to
macroeconomic instability if foreign liabilities rise too much
and foreign capital inflows dry up,” Nene said. “By reducing a
country’s dependence on foreign capital inflows, higher domestic
saving therefore makes an economy less vulnerable to sudden
reversals in capital flows.”

The current account deficit, the broadest measure of trade
in goods and services, widened to 7 percent of GDP in the first
quarter as mining and manufacturing exports collapsed.

South Africa also needs to boost its savings in order to
lift the economic growth rate, Nene said. Africa’s biggest
economy is in its first recession in 17 years, and will probably
contract 1.5 percent in 2009, according to the World Bank.

“It is crucial to raise the level of our national saving
in support of both short-term economic stability and long-term
productivity growth and prosperity,” Nene said.


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EU News

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Economy looking grim over there:

Highlights

European Investor Confidence Declined in July, Sentix Says
Germany Expects 450,000 New Long-Term Jobless in 2010, FAZ Says
Stark Says Governments Must Trim Budget Deficits, FAS Reports
Nowotny Says ECB to Watch Bond Program, Review Later
EU’s Barroso Says World Needs a Number of Stable Currencies
Spain’s Housing Slump May Last for Seven Years, Acuna Says
European Notes Gain as Stock-Market Decline Spurs Safety Demand


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European Commission sees permanent decline in euro area’s potential output

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Potential output is what you can produce with ‘everyone working’ in the broad sense, and productivity increasing as quickly as possible, unconstrained by policy.

The monetary system is always ready and able to be adjusted to allow this to happen.

It does help to have an administration that understands the monetary system, however.

Since that seems to be in short supply, yes, growth rates can very well be subdued for quite a while.

European Commission sees permanent decline in euro area’s potential output

As so often, it is best not to read the media coverage, but the original documents. The European Commission’s Quarterly Report on the Euro Area contains a rare bombshell – a special essay on the long implications of the financial crisis, which says that the crisis will cause long-term damage to the euro area, and turn its feeble long-term economic growth prospects into something altogether more sinister.

The financial crisis affects both component of productivity – capital accumulation through lower investment rates, and total factor productivity through the credit crunch – and this is likely to have a lasting negative long-term impact on potential output.

In the short run, the effect on potential output growth is a fall of 1.6% in 2007 to 0.7% in 2010. After the crisis, the potential output growth should grow again, but it may never reach its pre-crisis level again. On page 34 it says:
“In other words, the crisis will entail a permanent loss in the level of potential output. One of the factors that will shape the size of this loss is the speed at which the economy reverts to long-term trends. The slower the adjustment to long-term trends, the greater the final loss in potential output level compared with a pre-crisis expansion path. The risks that the adjustment process will be protracted appear unfortunately to be high due to the specific characteristics of the current crisis, including its duration, its global nature and underlying changes in risk behaviour.”


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California to issue IOU’s

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Tell Arnold to make them eligible for payment of state taxes and they can forever use the IOU’s for state purchases in place of $US

July 1 (Reuters) — California prepared on Tuesday to resort to issuing IOUs as the giant but cash-strapped U.S. state struggled to approve a new budget in time for the new fiscal year that begins on Wednesday.

The IOUs, which are notes promising payment to vendors and local agencies, or shutting down some public services, are among measures that California and other states may have to rely on as they contend with staggering budget gaps caused by the U.S. recession.


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Letter to the Governor of California

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Letter to the Governor of California

Dear Governor Schwarzenegger

I note that the State of California is planning to issue IOUs
(registered warrants) from tomorrow (July 2) to ease your cash situation
in the face of the political dispute you are having over the budget with
the Democrats.

My latest blog – California IOUs are not currency … but they could be!
– analyses this situation and suggests that you “tax-empower” these IOUs
– a move that will radically enhance the options available to you. You
can read the blog here

In summary:

1. It would be economic madness to start cutting your deficit now given
the extent of labour market deterioration your state is currently
enduring.

2. The present plan to issue IOUs will hurt the most disadvantaged
members of your community because the warrants will not be readily
tradeable and it is unclear whether banks will be prepared to hold them
for the interest payment on redemption (that is, cash them).

3. You can easily eliminate this disadvantage by making the IOUs
eligible for payment of Californian state taxes and fines. This one
change to your current plan will allow you to create your own sovereign
currency and the IOUs will become widely accepted within the community.
Even those who are not being directly paid in IOUs would be happy to
hold them because they would realise they could extinguish their tax
obligations to your government using them.

4. You could then use these IOUs forever for state purchases as a
substitute for USD and avoid issuing more debt.

5. You will also be able to directly employ the 2.1 million Californian
citizens who are currently unemployed with the IOUs and start using this
idle labour to advance public purpose via community development
projects.

If you need any further advice on this please do not hesitate to
contact me.

best wishes
bill

—

William F. Mitchell
Professor of Economics
Director, Centre of Full Employment and Equity
University of Newcastle
New South Wales, Australia


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