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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Archive for October, 2009

Restaurant Index Shows Contraction, Less Capital Spending

Posted by WARREN MOSLER on 30th October 2009


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Unfortunately the data for this index only goes back to 2002.

The restaurant business is still contracting …

Note: Any reading below 100 shows contraction for this index. The index is a year-over-year index, so the headline index might be slow to recognize a pickup in business, but the underlying details suggests ongoing weakness.

From the National Restaurant Association (NRA): Restaurant Industry Outlook Remained Uncertain as Restaurant Performance Index Declined in September for Second Consecutive Month

[T]he National Restaurant Association’s … Restaurant Performance Index (RPI) – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 97.5 in September, down 0.4 percent from August and its 23rd consecutive month below 100.

The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 96.0 in September – unchanged from August and tied for the second-lowest level on record. In addition, September represented the 25th consecutive month below 100, which signifies contraction in the current situation indicators.

The outlook for capital spending fell considerably from recent months. Thirty-seven percent of restaurant operators plan to make a capital expenditure for equipment, expansion or remodeling in the next six months, down sharply from 45 percent who reported similarly last month.


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Posted in Articles | 2 Comments »

gasoline demand vs 2 yrs ago

Posted by WARREN MOSLER on 29th October 2009


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I use comps from two years ago as last year was unusually choppy.

No sign of gasoline demand picking up that I can detect.

Starting to look like the Saudis decided to give themselves maybe a $10 per barrel price increase,
but too soon to tell.

GDP up some from last quarter but still below last year’s levels.

Inventories contributed .9% after being a drag previously, and motor vehicles contributed 1% to the 3.5% total GDP increase in this initial report.


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Posted in Comodities, GDP | 31 Comments »

Moody’s Lowers Outlook on Portugal,Greece On Downgrade Review

Posted by WARREN MOSLER on 29th October 2009


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The Euro zone remains at risk of a liquidity crisis for the national govts.

This doesn’t help.

On Thu, Oct 29, 2009 at 5:37 AM, wrote:

5:02 *MOODY’S CHANGES THE OUTLOOK ON PORTUGAL’S Aa2 RATING TO NEG (From
Stable)
5:01 *MOODY’S PLACES GREECE’S RATINGS ON REVIEW FOR POSSIBLE DOWNGRAD

MOODY’S SAYS REVISION IN GREECE’S PROJECTED 2009 DEFICIT ADDS TO
CONCERNS ABOUT RELIABILITY OF COUNTRY’S OFFICIAL STATISTIC

to be clear Moody’s has Greece on A1 while S&P already has them on A-
and for Portugal Moody’s still has it on Aa2 and S&P is very penalizing
on A+

Peripherals cheaper after the news (Portugal +2bps, Greece +3bps, Italy
+ 1.5bps)


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Posted in EU | No Comments »

Canada ready to buy $US on weakness

Posted by WARREN MOSLER on 28th October 2009


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From: Mario Seccareccia
Date: Sat, Oct 24, 2009 at 10:58 AM
Subject: RE: *Canada ready to buy $US on weakness
To: Warren Mosler

Warren,


I was at a conference in Quebec City on the issue of financialisation and I just got back literally during the night because of a nasty storm that caused flight delays last night.

However, the Governor of the Bank of Canada is under a lot of pressure from the export sector to do something about the high Canadian dollar because of the Dutch disease effects on the Canadian manufacturing sector. In fact, I have been invited to participate in a conference organized by the Quebec Federation of Labour and various employers’ associations in Montreal right at the beginning of December on exactly this question of the Canadian dollar.

As you know I stand with the Bank of Canada in defending a floating exchange rate but the Bank is under a lot of pressures from both those on the Right and on the Left of the political spectrum to institute some Chinese-style low (Can) dollar pegged exchange rate! This has been an on-going battle over the last few years every time the Canadian dollar is approaching parity with the US dollar. My position has always been to advocate fiscal (and monetary) policy to keep the economy on its full-employment path and I have proposed interregional transfers to deal with the problem of the Dutch disease. But it is very difficult for them to think in those terms because of their fixation with deficit spending and also because of the high constitutional fragmentation of the country that makes a policy of interregional transfers via the taxation of provincial natural resource revenues a political hot potato in Canada. Indeed, there have been even supreme court challenges from Newfoundland and others over the system of equalization payments because of the inclusion of provincial oil revenues in the formula for calculating the current regional transfers.

In any case, as you can see, given the current downward evolution of the US dollar, this might trigger competitive devaluations much as in the style of the 1930s.

Best,

Mario


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Posted in Currencies | 2 Comments »

The harder they come, the harder they fall

Posted by WARREN MOSLER on 28th October 2009

Diversification became a substitute for credit analysis.

But also, if the deficit gets too small, the economy will implode sufficiently to get the deficit back up through falling tax revenues and rising transfer payments.

So the ‘tougher’ the private sector is, the harder the automatic stabilizers will work to bring it down, no matter how ‘tough’ you make it.

Posted in Government Spending | No Comments »

mtg apps fall

Posted by WARREN MOSLER on 28th October 2009


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This is not a good sign as purchase apps are back down to very low levels:

The mortgage applications index fell 12.3 percent on a seasonally adjusted basis to 562.3, the Mortgage Bankers Association said. Purchase applications dropped 5.2 percent to 254.9 and refinancing demand sank 16.2 percent to 2,352.5 last week.


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Posted in Housing | No Comments »

Conservatives Say Low Rates Are U.K.’s Best Route Out of Slump

Posted by WARREN MOSLER on 28th October 2009


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Earlier this year I thought the UK was on track with their understanding of their monetary system.

Recent headlines don’t look so promising:

Conservatives Say Low Rates Are U.K.’s Best Route Out of Slump

By Robert Hutton and Jennifer Joan Lee

Oct. 28 (Bloomberg) — Philip Hammond, a lawmaker who speaks on Treasury policy for the Conservatives, said the opposition party wants the Bank of England to keep interest rates low and will cut the deficit to allow this to happen.

“It is essential that in the recovery we are able to continue to keep monetary policy relatively loose,” Hammond said in an interview at Bloomberg’s office in London. “We will only be able to do that if we have got the deficit under control.”

The focus on monetary policy contrasts with Prime Minister Gordon Brown’s argument that maintaining government spending is the best bring Britain out of the worst recession since World War II.

With an election due within seven months, the question of how and when to cut spending is at the heart of the debate between the ruling Labour Party and the opposition. Brown argues that maintaining spending and cutting taxes are the best ways to return to growth. The Conservatives say those steps risk lifting inflation and interest rates, choking off recovery.

“What has got Britain through the recession so far has been the activist monetary policy at the Bank of England, keeping interest rates low, supporting the economy through quantitative easing,” Hammond said. “We will only be able to do that if we have sent a clear signal to the markets that we intend to execute a plan to get the deficit under control. We need to make a start in 2010.”

‘Active Monetary Policy’

Conservative leader David Cameron yesterday said he was “a great believer in an active monetary policy,” a step away from previous comments that the bank’s quantitative easing program would have to end soon.

Cameron told journalists that a speech he’d made at the start of the month had been misunderstood. “The point I was making was about how easy or difficult to fund our debt, because the market for gilts hasn’t really been tested yet, because of QE,” he said. He repeated his point that the intervention will have to end some time. “You can’t go on indefinitely.”

Policy makers at the central bank will decide next week whether to extend their asset purchase program, which is pumping

175 bln pounds ($286 bln) in newly created money into the economy.

The program has increased demand for U.K. government bonds, known as gilts, as the Treasury sells a record 220 bln pounds of debt this year.

The Conservatives have repeatedly warned this year that Brown’s spending plans are putting the U.K.’s AAA debt rating at risk. Hammond’s boss, George Osborne, told an audience of financiers on Monday that it was only the likelihood of a Conservative victory at the next election that was keeping Britain’s debt costs down. Conservatives have led Labour in polls for two years.


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Posted in CBs, UK | 1 Comment »

Carney Says Intervention Needs Policy to Back It Up to Work

Posted by WARREN MOSLER on 27th October 2009


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CIBC Says Canada Should Consider ‘Bounded Float’ of Currency

This would help support exports. (But my first choice would instead be funding an $8/hr job for anyone willing and able to work and a tax cut to sustain domestic demand and optimize real terms of trade.)

Carney Says Intervention Needs Policy to Back It Up to Work

Oct. 27 (Bloomberg) — Bank of Canada Governor Mark Carney said today that central banks that try to affect the level of their currencies through market actions need to back the transactions with monetary policy to be effective.

Speaking to lawmakers, Carney said the bank could use tools, including quantitative easing, to implement policy with

the bank’s key interest rate as low as it can go.

Selling your own currency is the back up to your other, export oriented policy.

There is no limit to the amount of your own currency you can sell into a bid at that level.

The (operational) limit is how much the rest of world wants to buy at your selling price.

Quantitative easing has nothing to do with this.


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Posted in CBs, Currencies | 7 Comments »

Roubini Says Carry Trades Fueling ‘Huge’ Asset Bubble

Posted by WARREN MOSLER on 27th October 2009


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Again, maybe right but for the wrong reason.

My take is the gold and commodity bubble is due to people (Roubini included) believing Fed policy is inherently inflationary – printing money and all that – when it’s not.

When those funds are done being committed, it can all end very badly in a deflationary tumble.

Roubini Says Carry Trades Fueling ‘Huge’ Asset Bubble

By Michael Patterson

Oct. 27 (Bloomberg) — Investors worldwide are borrowing dollars to buy assets including equities and commodities, fueling “huge” bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini.

“We have the mother of all carry trades,” Roubini, who predicted the banking crisis that spurred more than $1.6 trillion of asset writedowns and credit losses at financial companies worldwide since 2007, said via satellite to a conference in Cape Town, South Africa. “Everybody’s playing the same game and this game is becoming dangerous.”


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Posted in Comodities, Currencies | 4 Comments »

Carry trade

Posted by WARREN MOSLER on 27th October 2009


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The article completely misses the point.

There is no ‘cash pouring into’ anything.

Nor is there a constraint on lending/deposits in any non convertible currency.

It is not a matter of taking funds from one currency and giving them to another.

There is no such thing.

Yes, the interest rate differential may be driving one currency high in the near term (not the long term) due to these portfolio shifts.

But the nation with the currency seeing the appreciation has the advantage, not the other way around.

Imports are the real benefits, exports the real costs, which the author of this piece has backwards.

The nation with the stronger currency is experiencing improving real terms of trade- more imports in exchange for fewer exports.

The most common way to realize this benefit is for the government to use the currency strength to accumulate foreign currency reserves by ‘pegging’ its currency to sustain it’s exports. This results in the same real terms of trade plus foreign exchange accumulation which can be of some undetermined future real benefit.

Better still, however, is cut taxes (or increase govt. spending, depending on your desired outcome) and sustain domestic demand, employment, and output, so now the domestic population has sufficient spending power to buy all that can be produced domestically at full employment, plus anything the rest of the world wants to net export to you.

Unfortunately those pesky deficit myths always seem to get in the way of anyone implementing that policy, as evidenced by this
article below and all of the others along the same lines. Comments in below:

>   
>   Steve Keen pointed me to it. Talks about the carry trade in US$ over to AUD$.
>   There are not Federal unsecured swap lines, would be interested in your take.
>   

Foreign speculation on our currency is a bubble set to burst

By Kenneth Davidson

Oct. 26 (National Times) — The pooh-bahs running US and British hedge funds and the banks supporting them are more than capable of reading the minutes of the Reserve Bank of Australia board meetings and coming to the conclusion that RBA Governor Glenn Stevens is committed to pushing up the cash rate from the present 3.25 per cent to 4 to 5 per cent if necessary.

And they are already betting tens of billions of dollars on what has so far been a sure bet.

But is always high risk, and not permitted for US banks by our regulators, though no doubt some gets by.

These foreign financial institutions are up to their old tricks. After getting trillions of dollars out of their respective governments to avoid GFC-induced bankruptcy – which was largely engineered by their criminal greed – because they are ”too big to fail”, they are already using their influence to maintain ”business as usual”.
Why funnel the money gouged out of American and British taxpayers into lending to their national economies to maintain employment when there are richer pickings elsewhere?

As above, these transactions directly risk shareholder equity. The govt. is not at risk until after private capital has been completely eliminated.

Two of those destinations are Brazil and Australia. Their resource-rich economies are still doing well compared with most other countries because they are riding in the slipstream of the strong demand for commodities from China and India.

Cash is pouring into these economies, not for development, but to speculate on the local currency and the sharemarket. The rising value of the Brazilian real and the Australian dollar against the US dollar has had a disastrous impact on both countries’ non-commodity export and import competing industries.

Yes, except to be able to export less and import more is a positive shift in real terms of trade, and a benefit to the real standard of living.

Brazil’s popular and largely economically successful left-wing Government led by President Lula da Silva is meeting the problem head on. It has decided to impose a 2 per cent tax on all capital inflows to stop the real appreciating further.

Instead, it could cut taxes to sustain full employment if that’s the risk they are worried about.

Arguably, the monetary strategy adopted by Stevens has compounded Australia’s lack of international competitiveness for our manufacturing and service industries, especially tourism. Since the end of 2008 our dollar has appreciated 27 per cent (as of last week). This means that financial institutions that invested money at the beginning of January are enjoying an annual rate of return on their investments of 35 per cent.

Tourism is an export industry. Instead of working caring for tourists a nation is better served taking care of its people’s needs.
And those profits are from foreign capital paying ever higher prices for the currency.

US and British commercial banks can borrow from their central banks at a rate less than 1 per cent. The equivalent RBA rate is 3.25 per cent and many pundits are forecasting the rate could go to 3.75 per cent before the end of 2009. This will increase the differential between Australian and British and US interest rates and make the scope for speculative profits even higher.

They are risking their shareholder’s capital if they do that, not their govt’s money, at least not until all the private equity is lost.
And the regulators are supposed to be on top of that.

Since the beginning of the year, $64 billion has poured into Australia in the form of direct and portfolio (share) investment and foreign lenders have switched $80 billion of foreign debt payable in foreign currencies to Australian currency. Most of the portfolio investment ($41 billion) has gone into bank shares. Banks now represent 40 per cent of the value of shares traded on the stock exchange, and while shares in the big four bank shares have increased by about 80 per cent (as measured by CBA shares), the Australian Stock Exchange Index has risen by only 30 per cent.

When anyone buys shares someone sells them. There are no net funds ‘going into’ anything.

Also, portfolio mangers do diversify globally, and I’d guess a lot of managers went to higher levels of cash last year, and much of this is the reversal. And it’s also likely, for example, that Australian managers have increased their holdings of foreign securities as well.

Foreigners have shifted out of Australian fixed interest debt and into equities because as interest rates go up, the capital value of fixed debt declines. By driving up interest rates to curb inflationary expectations and the prospect of a housing price bubble the RBA is in far greater danger of creating a stock exchange asset price bubble as well as an Australian dollar bubble. Once foreigners believe interest rates have peaked, the bubbles are likely to be pricked as financial speculators attempt to realise their gains. This could lead to a stampede out of Australian denominated securities.

Markets do fluctuate for all kinds of reasons, both short term and long term. The Australian dollar has probably reacted more to resource prices than anything else. But again, the issue is real terms of trade, and domestic output and employment.

With unemployment expected to continue to rise, and the level of unemployment disguised by growing numbers of workers being forced to work part-time, there is little chance of the underlying inflation rate, already below 2 per cent, increasing as a result of a wages break-out. The last wages breakout (leaving aside the explosive growth in executive salaries in the past three decades) occurred in 1979.

This gives the govt. cause to increase domestic demand with fiscal adjustments, including Professor Bill Mitchell’s ‘Job Guarantee’ proposal which is much like my federally funded $8/hr job for anyone willing and able to work proposal.

The world has moved on but the obsessive debate about wage inflation and union powers hasn’t. Since the beginning of the ’80s, the problem has been periodic bouts of asset price inflation. It is the biggest danger now.

Instead of controlling the unions, there should be control of financial institutions. The Australian dollar bubble and the incipient housing bubble should be micro-managed. Capital inflow could be dampened by a compulsory deposit of 1 to 2 per cent to be redeemed after a year to stop speculative inflow. Home ownership has become a tax shelter. The steam could be taken out of the rise in house prices if negative gearing was limited to new housing. This would obviate the need for higher interest rates that affect everyone.

The Job Guarantee offers a far superior price anchor vs our current use of unemployment as a price anchor. Also, I strongly suspect that the mainstream has it wrong, and that it is lower rates that are deflationary.


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Posted in Banking, BRIC, CBs, Comodities, Currencies | 4 Comments »

Weekly Credit Graph Packet – 10/26/09

Posted by WARREN MOSLER on 26th October 2009


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The great repricing of risk has brought us to this point and volatility seems to be settling in at lower levels as well.

So where are we?

Due to funding risks, spreads are now at levels where they need to be to provide risk adjusted returns on capital for banks to approximately represent returns on capital needed for banks to attract that capital.

For example, if a bank obtain assets that earn 2% (after expenses) above it’s funding costs, and in today’s market regulators target a 12% tier one capital ratio, the return on capital is a little over 15%.

In the past, banks struggled to make this kind of spread as they were competing with non banks that could leverage higher than that, supported by investors willing to accept much lower risk adjusted returns, and also supported by banks willing to work for lower risk adjusted returns in their higher leverage off balance sheet entities.

Credit Graph Packet


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Posted in Banking, Credit | No Comments »

Rasmussen Poll and deficit reduction

Posted by WARREN MOSLER on 26th October 2009


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Don’t underestimate the power of public opinion on Congress.

Deficit myths remain public enemy number one.

Daily Presidential Tracking Poll
Saturday, October 24, 2009

The Rasmussen Reports daily Presidential Tracking Poll for Saturday shows that 30% of the nation’s voters Strongly Approve of the way that Barack Obama is performing his role as President. Forty percent (40%) Strongly Disapprove giving Obama a Presidential Approval Index rating of -10 (see trends).

Thirty-eight percent (38%) of voters say deficit reduction is the top priority for Washington to obtain while 23% say health care is most important. Among Democrats, health care is most important. Among Republicans and unaffiliated voters, health care is fourth on the priority list.

Check out our review of last week’s key polls to see “What They Told Us.”

The Presidential Approval Index is calculated by subtracting the number who Strongly Disapprove from the number who Strongly Approve. It is updated daily at 9:30 a.m. Eastern (sign up for free daily e-mail update). Updates also available onTwitter and Facebook.

Overall, 47% of voters say they at least somewhat approve of the President’s performance. Fifty-one percent (51%) disapprove.

Tracking poll data shows that just 56% of conservatives consider themselves Republicans. Separate polling shows that 73% of GOP voters say Congressional Republicans have lost touch with the party’s base.


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Posted in Deficit, Government Spending | 2 Comments »

April 10 2006 post

Posted by WARREN MOSLER on 26th October 2009


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Worth a quick look at how I saw it in April 2006.

Turns out I was right about demand weaking from that date, but wrong about the Fed reaction function.

I thought they’d follow the mainstream view and respond to elevating inflation expectations.

Instead, Bernanke and Kohn subsequently looked past sharply elevating inflation expectations to the output gap when they first cut rates.

Link


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Posted in CBs, Fed, Inflation | No Comments »

taxes and money

Posted by WARREN MOSLER on 23rd October 2009


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you are addressing a room full of people.

you tell them taxes turn litter into money.

you try to sell your business cards to the group for $5 each.

probably no takers.

you offer your cards to anyone who stays to help clean up the room

no takers.

you then point to the man at the door with the 9mm who’s the tax collector, and no one leaves without 10 of your business cards.

you then repeat the questions.


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Posted in Currencies | 11 Comments »

Canada ready to buy $US on weakness

Posted by WARREN MOSLER on 23rd October 2009


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While he’s a bit shaky on his understanding of monetary operation his intentions are clear enough:

Bank of Canada talks tough on rising dollar

By Kevin Carmichael

Oct. 3 (The Globe and Mail ) — Bank of Canada Governor Mark Carney is done with nuance. His new message for those who doubt he’s prepared to weaken the dollar if Canada’s recovery veers too far off track: Just watch me.

Despite stronger than expected growth in the second half, the central bank has actually reduced its outlook for the next two years, saying that’s when the current appreciation of the currency will show up in growth figures.

Given that backdrop, Mr. Carney said he would have no choice but to act if international investors continue to push the dollar higher – something they’ve been quite willing to do, in part because most analysts and investors are skeptical a central bank that hasn’t intervened in currency markets since 1998 is willing to back up its talk with action.

But if the currency continues to surge, Mr. Carney stressed that he retains “considerable flexibility” to stoke the demand required to get inflation back to the 2-per-cent target. His options would include creating money to buy U.S.-dollar denominated assets or direct intervention in foreign exchange markets.


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Posted in Currencies | No Comments »

Baker Critique

Posted by WARREN MOSLER on 23rd October 2009


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CENTER FOR ECONOMIC AND POLICY RESEARCH
________________________________________

Does Citigroup Need China?

By Dean Baker

Most of the economists and pundits who could not see an $8 trillion housing bubble are telling us that the United States desperately needs for the Chinese government to keep buying its debt. This crew of failed analysts argues that without the support of the Chinese government, interest rates in the United States will rise, choking off the recovery. In reality, the decision by China to stop buying U.S. government debt may not harm the economy’s recovery, but it could be devastating to the recovery efforts at Citigroup and other basket case banks.

The basic logic is simple. China’s central bank has been buying up huge amounts of dollar-based assets for the last decade. Their purchases include short and long-term government debt, mortgage backed securities, and, to a lesser extent, private assets.

The Chinese central bank’s purchases have two effects. First, they help to keep interest rates low. This supports economic growth by keeping down the interest rate on mortgages, car loans, and other borrowing that boosts demand.

Interest rates are lower than otherwise only if China’s maturity preference is longer than that of who would otherwise have the excess balances and buy treasury securities. And most of what they buy is probably short term and therefore has little influence on rates.

The other effect of China’s purchase of dollar-based assets is that it keeps down the value of its currency against the dollar. This is the famed currency “manipulation,” that draws frequent complaints from politicians. Of course, it is not exactly manipulation. China has an explicit policy of keeping down the value of its currency against the dollar. It is not buying up hundreds of billions of dollars of U.S. assets in the dark of night. It does it in broad daylight in order to keep its currency at the targeted rate.

Right. They keep their currency down to keep their domestic real wages low enough to be ‘competitive.’

Suppose China stopped buying up U.S. government debt. Interest rates in the U.S. would rise,

Very little, if any.

which would have some negative impact on growth.

Very small impact, if any.

Of course, the Fed could try to offset this rise in rates by simply buying more debt itself. It has already been buying debt and it could simply buy enough to replace the lost demand from China. This would leave interest rates largely unchanged.

Yes, any time the Fed wants tsy rates lower it can simply buy them in sufficient quantities to keep rates at their desired target rate.

Suppose that the Fed doesn’t intervene and lets interest rates rise.

A few basis points.

This will have some negative impact on growth,

Tiny

but there will also be a very positive side effect from China’s decision to stop buying dollars. The dollar would fall in value against China’s currency. This would make Chinese goods more expensive in the United States, leading U.S. consumers to purchases fewer imports from China and more domestically produced goods.

Yes, which reduces our standard of living.
Imports are real benefits, exports real costs.

A lower-valued dollar would also make our exports cheaper in China. That would allow us to export more to China.

Right, we work and produce goods and services but instead of consuming them domestically we send them to china for them to consume. We become the world’s slaves instead of China.

The net effect would be an improvement in our trade balance,

The number goes towards positive, but that’s not ‘improvement’ from a US standard of living point of view.

bringing back some of the 5.5 million jobs that we’ve lost in manufacturing over the last decade.

We can sustain domestic demand at full employment levels with fiscal policy, such that there is sufficient demand for us to buy all we produce plus whatever the rest of world wants to send us.

And fewer manufacturing jobs means people in the us are free to produce other real goods and services for domestic consumption. It’s all a matter of sustaining domestic demand with the right fiscal adjustments.

In fact, since nearly all economists agree that the current trade deficit can’t persist for long, China would be helping the country bring about a necessary adjustment if it stopped buying up dollars.

Its their loss and our gain. Why should we work to kill the goose that’s laying the golden eggs for us?

Even the rise in interest rates would have a positive effect since it would allow for the completion of the deflation of the housing bubble, with house prices finally settling back to their trend levels. This drop in house prices will be a painful adjustment, but there is no way to avoid it.

How about supporting incomes through a full payroll tax holiday, and a $500 per capita revenue distribution to the states, and a federally funded $8/hr job for anyone willing and able to work
To use an employed labor buffer stock rather than an unemployed labor buffer stock as a price anchor.

Bubbles cannot be sustained indefinitely and we are better off allowing the housing market to return to normal so we can get back to a path of sustainable growth.

Sustaining incomes on a moderate 3% growth path rather than the current -3% path personal income is now on will work wonders for stabilizing the housing markets, and fixing the banks as well from the bottom up, as the bad loan problem improves due to falling delinquencies. Instead, the govt has been using top down funding of the banks that has resulted in delinquencies continuing to rise.

While the decision of the Chinese to stop buying dollars might be good for the economy,

Only because we do not understand the monetary system sufficiently to know how to sustain domestic demand.

it is likely to be disastrous for Citigroup and the rest of the basket case banks. If interest rates rose, then the value of the government bonds they hold would plummet. If the interest rate on 10-year Treasury bonds goes from the current 3.5 percent to a still-low 4.5 percent, then the banks will have lost 8 percent on their holdings. At a 5.5 percent interest rate, a rate that would still be far below the average for the 90s, the loss would be 15 percent. Citi and the other basket cases could not endure these losses in their current financial state.

Only if they currently have a maturity mismatch, which is not permitted by regulation. Bank regulators and supervisors get ‘gap’ reports for the banks to make sure they aren’t taking that kind of interest rate risk. If they are it’s a violation that the regulators need to put an end to.

This could be why we see shrill pronouncements from the likes of the Washington Post editors, and other “experts” who couldn’t see an $8 trillion housing bubble, that we need the Chinese government to keep buying up our debt.

Not likely the reason they think we need China to buy our debt.

We absolutely do not need the Chinese government to keep buying U.S. debt and would almost certainly be better off if it stopped tomorrow. Citigroup and the other big banks do need the Chinese government to keep the money flowing if they are to have a chance of getting back on their feet.

‘Money flowing’ has nothing to do with interest rates. The fed can set the risk free rate at whatever level it wants to.

And we know where the sympathies of the Washington Post’s editors and other “experts” lie.

— This article was published on October 19, 2009 by the Guardian Unlimited [http://www.guardian.co.uk/commentisfree/cifamerica/2009/oct/19/china-us-economy-debt].

________________________________________

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, “Beat the Press”, where he discusses the media’s coverage of economic issues.

The Center for Economic and Policy Research is an independent, nonpartisan think tank that was established to promote democratic debate on the most important economic and social issues that affect people’s lives. CEPR’s Advisory Board includes Nobel Laureate economists Robert Solow and Joseph Stiglitz; Janet Gornick, Professor at the CUNY Graduate Center and Director of the Luxembourg Income Study; Richard Freeman, Professor of Economics at Harvard University; and Eileen Appelbaum, Professor and Director of the Center for Women and Work at Rutgers University.


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Posted in China | 1 Comment »

China and the $US

Posted by WARREN MOSLER on 23rd October 2009


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Looks like China is pretty much keeping its currency stable vs the dollar and depreciating against the rest of the world, probably to support it’s exporters.

(Note the recent rise in exports and rhetoric regarding the importance of exports.)

This means if the currency is ‘naturally’ strong China is buying $US financial assets to keep it fixed to the $US. The second chart shows holding of tsy secs but China could also be adding agencies and other $US financial assets now that ‘agency credibility’ has been restored.

Seems they are quietly testing the waters to see if Geithner will come down on them as Paulson did.

If we had an administration that understood the monetary system we’d encourage them to do this and export without limit, while sustaining domestic demand with fiscal adjustments (lower taxes and/or higher spending, depending on your politics) which obviously ‘good things’ (again, if you understand the monetary system).

In fact, with the entire world seeming desirous of exporting to the US if only we would let them, a serious level of prosperity is there to be had.


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Posted in BRIC, China | 11 Comments »

alternative to first time homebuyer proposals

Posted by WARREN MOSLER on 23rd October 2009


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Instead of tax credits, maybe have the housing agencies offer 0% down loans to first time home buyers, and reimburse the agencies for any associated losses up to $8,000, or whatever number they deem appropriate, etc?

It’s functionally nearly identical, a lot less ‘regulatory intensive,’ and not an immediate ‘budget item.’


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Posted in Housing | No Comments »

Yuan Peg Spurs Exports

Posted by WARREN MOSLER on 23rd October 2009


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If the yuan is ‘naturally’ stronger than that it means they are accumulating dollar reserves without the wrath of the US administration.
This will encourage other potential exporters to do the same and help the dollar find a bottom.

The Eurozone, however, remains ideologically inhibited from buying dollars yet is also determined to support demand through exports.

Crude oil remains key. Higher prices make dollars ‘easier to get’ overseas, lower prices make the dollar ‘harder to get.’

Yuan Peg Spurs Exports, Luring Pimco as Dollar Sinks

By Bloomberg News

Oct. 13 (Bloomberg) — Investors are the most bullish on the yuan in 14 months as China’s exporters say the currency’s link to the slumping dollar is helping revive sales.

Contracts based on expectations for the currency’s value a year from now show the yuan will appreciate 3 percent, compared with estimates for 0.5 percent two months ago, data compiled by Bloomberg show. Twelve-month non-deliverable forwards touched 6.5440 per dollar on Oct. 20, the strongest level since August 2008. They rose 0.3 percent to 6.6265 today, compared with a spot exchange rate of 6.8275.

The dollar’s decline against all 16 of the most-active currencies in the past six months has made Chinese exports more competitive because the government has pegged the yuan to the greenback since July 2008. Union Investment and Martin Currie Investment Management Ltd., which oversee a total of $250 billion, are buying contracts that will profit from an end to the peg, predicting the yuan will gain 5 percent a year.

“Exports are beginning to pick up,” said Douglas Hodge, the chief operating officer of Pacific Investment Management Co., which runs the world’s largest bond fund. “The fact that the dollar has fallen makes the yuan cheaper relative to the euro and the yen, so it does begin to improve their export picture.”


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Posted in BRIC, China, Comodities, Currencies | 8 Comments »

Fitch Sees 60% of Current RMBS Borrowers Underwater

Posted by WARREN MOSLER on 23rd October 2009


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Yes, interesting that over 75% are still paying and probably will continue to pay for a variety of reasons, including they personally guaranteed the payments, their payments have, in many cases, gone down, they like living where they are living, and, not least, they believe in meeting their obligations.

A corrupting influence that, anecdotally, is widespread is that most assistance programs require you be delinquent. A friend of mine who is current on his mtg and intends to stay current was just told he could get assistance if he stopped making his payments.

When govt. implements programs with these kinds of incentives they induce a breakdown in the moral fabric of the society.
There have always been numerous examples of this, particularly with the income tax laws, but the last year has seen a disturbing increase in new legislation with counterproductive incentives.

This also begs for a payroll tax holiday and per capita federal revenue sharing for the states to enhance net incomes needed to make the mortage payments and ‘fix’ the economy from the bottom up.

Yet the entire Congress as well as the Administration seems silent on this issue.

Fitch Sees 60% of Current RMBS Borrowers Underwater

By Diana Galobay

Oct. 13 — The majority — 60% — of remaining performing borrowers within ‘06- and ‘07-vintage residential mortgage-backed securities (RMBS) bear negative home equity, meaning they are underwater on their mortgages and owe more than their houses are worth.

This overwhelming presence of negative equity is hampering sustained improvement in RMBS performance, according to Fitch Ratings.

“[N]egative equity reduces a borrower’s inventive to pay their mortgage and limits their options when faced with financial difficulties,” said senior director Grant Bailey in a statement.

The rate of previously performing borrowers rolling into delinquency status showed “notable improvement” in the first half of 2009 and stabilized during the summer at an elevated level. The percentage of previously performing borrowers rolling into delinquency “increased modestly” in September, Fitch said.

The rating agency expects US unemployment to peak at 10.3% in the middle of next year, further pressuring current borrowers. House prices will ultimately decline another 10% over the next year.

“Home price figures in recent months were temporarily helped by the reduced share of distressed property liquidations due to foreclosure moratoriums and servicers’ increased efforts to qualify borrowers for modifications,” Fitch said. “However, the number of distressed borrowers has continued to grow.”

The rating agency noted the number of non-agency borrowers 90 plus days delinquent reached 1.66m in September — the highest level on record.

“While increased modification efforts and an extension of the first time home buyer tax credit may help home prices, the ultimate increase in liquidations from the growing distressed inventory will likely cause a further price decline,” Bailey said.


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