Daily Archives: August 12, 2009 @ 2:29 pm (Wednesday)

ECB statements

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ECB’s Stark Says Economy May Recover Sooner Than Forecast

Stark Says State Debt May Boost Long-Term Market Rates, BZ Says

*ECB’S STARK SEES `NO BIG PROBLEMS’ UNWINDING ASSET PURCHASES

*ECB’S STARK COMMENTS IN INTERVIEW WITH BOERSEN-ZEITUNG

*ECB’S STARK SAYS RISING GOVT DEBT MAY BOOST LONG-TERM MKT RATES

*STARK SAYS ECB CONSIDERS RISK OF DEFLATION `VERY SMALL’

*ECB’S STARK SAYS MUST NOT OVERESTIMATE SIZE OF OUTPUT GAP

Higher levels of unemployment will be needed for long term price stability

*ECB’S STARK SAYS POTENTIAL GROWTH RATE HAS PROBABLY DECLINED

Higher levels of unemployment will be needed for price stability

*ECB’S STARK SAYS OUTPUT GAP MAY BE SMALLER THAN SOME THINK

Higher levels of unemployment will be needed for price stability.

*ECB’S STARK SAYS MUST BE CAUTIOUS ABOUT INFLATION OUTLOOK

*STARK: STIMULUS, INVENTORIES WON’T CREATE SUSTAINABLE GROWTH

*ECB’S STARK SAYS ECONOMY MAY RESUME GROWTH SOONER THAN EXPECTED

*ECB’S STARK SEES SIGNS ECONOMY IS STABILIZING

*ECB’S STARK SAYS RATES ARE `APPROPRIATE’


Karim writes:

Stark is also engaging in classic Fed bashing; knowing full-well that the output gap is the key driver of the Fed’s inflation model while the ECB looks at a broader series of measures and places much more emphasis on monetary aggregates


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US Consumption and Tax Policy

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Some interesting bits.

Supports my contention that we are seeing real wealth flowing upward and will continue to do so.

Note the distribution of consumption, which has been moving north as well.

Proposed tax policy won’t change any of this- higher incomes will more than offset increased marginal tax rates for the top tax brackets, and consumption will increase.

And yes, an economy can work via aggregate demand coming predominately from the top, with the bottom at subsistence levels. And we are moving in that direction.

Interestingly, as this happens the wealthy are considered ‘good’ when they hire hundreds of service people to take care of their homes, boats, personal fitness, and entertaining, etc. as they are ‘providing jobs.’

This also fits well with the export economy model our leaders are pushing hard to achieve. And the trade numbers are looking like they are succeeding. Notice the trade gap narrowing as standards of living fall.

Interesting research from ML-BAS highlighting the importance of the tax policy debate for US consumption growth and consequently US GDP:

US Consumption (Currently 72% of GDP)

  • Outlook for consumption depends on consumer outlook—on disposable income, wealth, and credit quality.
  • Wealthy (top 10% of earners) have a surprisingly high share of consumption (42%) with the middle class (40-90 percentile) composing 46% of consumption.

The US consumer as a whole is not overleveraged—the middle class is.

  • 200% debt to income and 25% debt to assets ratios are substantially higher than the wealthy’s corresponding ratios of approx. 120% and 8% respectively.

Housing wealth has a bigger impact on consumption than stock market wealth.

Wealthy have weathered the last two years a lot better than the middle class:

  • Retained employment much better.
  • Suffered lower wealth losses
  • Substantially less proportion of assets in housing.

Conclusions:

  • Overleveraged middle class burdened by real estate losses will not help consumption rebound.
  • Lower income segment has a relatively small proportion of income, suffers from a disproportionate share of unemployment which lags GDP out of a recession.
  • Wealthy –with modest leverage, near full employment, and experiencing a faster rebound in their wealth should lead consumption if all else stays the same.
  • However, reliance on government borrowing has increased as a result of addressing the credit crisis as well as the potentially ambitious health care reform bill.
  • Rising taxes (especially the “soak the rich” policies that are on the table) may offset potential consumption growth as the most important determinant of consumption is after tax income.
  • The outlook for tax policy on the top earners may provide a key swing factor to the consumption outlook.


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Trade/FOMC Preview/China Exports/Stimulus hangups

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Karim writes:

Trade: Exports up 2%, Imports up 2.3%. Imports ex-petroleum down 1% and consumer goods imports down 4.8%. Sector strength mainly in industrial goods (restocking), but indicators of final demand still look weak.

Don’t look for dramatic changes to FOMC statement; major focus will be on Treasury purchase language.

1) Econ assessment will turn slightly more positive; May mention signs of a nascent recovery, though underlying demand likely to remain weak for the foreseeable future. Inflation will remain subdued.

2) Exceptionally low FF rate for an ‘extended period’ will remain. I’d expect this phrase to be dropped about 3-4mths before they’d actually hike, with the first move possibly being a hike in the rate they pay banks on excess reserves.

3) Likely to indicate that Treasury purchases will not continue once the $300bn level has been reached, though they may restart the program in the future if needed. Language on other credit easing programs to stay intact.

China’s export model showing little bounce (latest data last night)

Some hangups with the stimulus package (courtesy of American General Contractors):

“President Barack Obama’s stimulus spending has run into a problem: A shortage of General Electric Co. water filters,” Bloomberg News reported on Thursday. “GE makes them in Canada. Under the program’s ‘Buy American’ rules, that means the filters can’t be used for work paid for by the $787 billion fund. Contractors are searching the U.S. in vain for filters as well as bolts and manhole covers needed to build wastewater plants, sewers and water pipes financed by the economic stimulus. As officials wait for federal waivers to buy those goods outside the U.S., water projects from Maine to Kansas have been delayed….the Environmental Protection Agency, which administers the water funding, has granted six waivers and has 29 petitions pending….The rules affect water projects most because highways and bridges have been constructed under Buy American regulations for the past 30 years, and not much stimulus money has been spent so far on public housing and schools, said Chris Braddock, the U.S. Chamber of Commerce’s associate director for procurement.”

“Gun-shy [school] administrators might undermine a federal stimulus program that encourages school construction by helping districts pay down debt,” the (Wisconsin) Daily Reporter reported on Monday. “Some district leaders say they gladly are accepting a piece of $125 million in no-interest bonds but are reluctant to invest the savings in new projects. ‘The climate out there is terrible and with the cuts made in the state budget, it’s just really difficult right now,’ said John Whalen, president of the Sun Prairie Area School District Board of Education. ‘I don’t anticipate this will encourage us to do more projects,’ he added. The district received $23 million in federal bonding, more than any other district in the state, though the bonding did not encourage additional construction. Sun Prairie used it to help pay off the $30 million it put on taxpayers for construction of a new high school and conversion of the old high school into a middle school. Both schools are scheduled to open in fall 2010. While Sun Prairie stands pat, other districts might jump at the opportunity. The School District of La Crosse received $6.6 million in bonds to help pay off debt from $18.5 million in expansion, renovation and upgrade projects.”


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Zombie Economy: European Industrial Production Unexpectedly Declines

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Looks to me like the world hit a ‘soft spot’ in July, maybe due to the winding down of China’s suspected ‘inventory building.’

CPI’s continue to fall in the Eurozone indicating continuing domestic demand weakness.

Strong productivity gains are not being matched with fiscal adjustments to sustain output and employment, as evidenced by a continuing rise in unemployment and a widening of the output gap.

I like the term Zombie economy as the world continues to unknowingly rely on ‘automatic stabilizers’ for a very ugly means of fiscal adjustment.

Meanwhile, as unemployment continues to rise, they wait, with blind certainty for the mythical ‘kicking in of billions’ by Central Banks to somehow take effect, and be so powerful, that they are spending their time debating irrelevant ‘exit strategies’ from this non event for aggregate demand.

Right now there is no hope for further US fiscal adjustment, barring a major economic setback. President Obama has pledged not to sign a health care bill that is not ‘revenue neutral’ and it’s all but certain marginal tax rates will rise next year.

And the increased expenditures for ‘shovel ready’ projects, merits of the projects aside, are being offset by forced cut backs by States that continue to face revenue shortages due to the fall in GDP.

Banks that have been sustained by wide net interest margins that offset lingering loan losses are now seeing portfolios run off, as those with positive cash flow (corporations with flat sales and consumers in foxholes still worried about job losses) are paying down debt and net new lending languishes.

  • European Industrial Production Unexpectedly Declines
  • Liikanen Says Next Months Will Show If Euro Area Through Worst
  • French Consumer Prices Fall for Third Month on Energy, Retail
  • European Government Bonds Extend Gain After BOE Inflation Report


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