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Archive for December 15th, 2009


Posted by WARREN MOSLER on 15th December 2009

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Karim writes:


  • Headline CPI +0.4% and core +0.034%
  • OER -0.1% and volatile items largely offsetting (lodging away from home -1.5% vs tobacco +1% and vehicles +0.8% (after +1.7% prior month))
  • Favorable base effects for core coming in H1 2010 should see y/y drift to 1% from current 1.7%


  • Starts up 8.9%; largely payback from weak October and driven by multi-family
  • Single family up 2.1% (-7.1% prior) and multi-family up 67.3% (after down cumulative 51% prior 2mths)
  • Permits +6% (versus prior -4.2%)
  • Net/Net housing component of GDP likely to remain flat/slightly positive for next 2-3 quarters


Posted in Housing, Inflation | No Comments »

Eurobond Being Mulled Again Amid Fears Over Greece

Posted by WARREN MOSLER on 15th December 2009

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Looks like it’s serious enough for this, thanks.

And anything done at the national level serves to weaken the group as a whole.

Eurobond Being Mulled Again Amid Fears Over Greece>

2009-12-15 15:40:15.949 GMT

PARIS (MNI) – Eurozone leaders, reacting to worries about the situation in Greece and its potential fallout are looking at the option of a special fund to provide emergency aid, a well-placed monetary source told Market News International.

The source, who is familiar with the ongoing discussions, said that if a eurobond proposal ended up being nixed, “there is also the option of a solidarity rescue fund to which all eurozone countries can contribute.”

It’s not quite clear how the EU or eurozone would get around the so-called “no-bailout clause,” but there is a sentiment among many EU leaders that the clause has lost credibility because the political and economic costs of letting a member state fail would be too high.

The no-bailout clause, in article 103 of the EU Treaty, says that neither the EU, the ECB nor any national government “shall…be liable for or assume the commitments” of a member state.

A eurobond, depending on how it was structured, could be a hard sell in this regard. However, some sort of fund that loaned to a country – but did not take on any burden associated with its debt – might just pass muster.

It’s unclear what such a fund might look like, since one has never been attempted. But one option might be for large EU countries or the EU to create a special facility through which it borrowed money in the bond market to help the member in trouble.

Such an arrangement might be similar to the bonds that the European Commission has already issued for the emergency facility from which Hungary and Latvia have been borrowing. Under current rules, these particular EU Commission bonds can’t be used to help eurozone members.

Some observers have warned that any arrangement smacking of a bailout – whether a eurobond or “solidarity fund” — could potentially be regarded as unfair by countries such as Ireland, which has already announced stiff spending cuts to try and put its fiscal house back in order.

However, proponents of doing something would argue that Ireland is not yet out of the woods and could be submerged again in the market undertow should the situation in Greece lead to a more generalized selloff of peripheral EMU sovereign debt.

So far, other peripherals have been largely spared in the recent tumult surrounding Greece, which is by far the worst performing among sovereign eurozone issuers.

The spread on Greek bonds widened Tuesday by 24 basis points to 253 points above the benchmark German Bund, on market disappointment over a paucity of budget balancing details contained in the speech Monday night by Greece’s Prime Minister George Papandreou.

By contrast, Ireland’s sovereign paper was unchanged at a spread of 165 points above Bunds; Spain widened just 1 point to a spread of 62 basis points; Portugal widened 2 points to 67 bps above Bunds.

Papandreou pledged to bring Greece’s deficit back to within the Maastricht limit of 3% of GDP within four years, but some of the other details were sketchy. On the revenue side – Greece’s government has promised a hefty 40% increase – Papandreou mentioned a new progressive tax on all sources of income, as well as the abolition of certain tax exemptions, a new capital gains tax and a stiff tax on bonuses. He also promised new revenue from a reinvigorated fight against tax evasion.

On spending, he pledged a freeze on public sector wages above E2,000 a month; a 10% cut in supplemental wages; a hiring freeze in most sectors for 2010; and a 10% cut in social security spending next year.

Reaction was lukewarm not only in markets but also at the European Commission, which in each of the past 5 years has registered dissatisfaction with spending and revenue estimates posited by Greece, calling them overly optimistic.

“It’s not just a question of words but also deeds,” the spokesperson for European Monetary and Economic Affairs Commissioner Joaquin Almunia said Tuesday, adding that the Commission wants to see “concrete measures” to get [Greece's] budget deficit “moving downwards as soon as possible.”

Greece is expected to submit specific proposals to the Commission shortly after the New Year.

Meanwhile, the ECB is expected on Thursday to consider the possibility of further ratings downgrades on Greek debt.

“In the case of a further downgrade, we must be prepared, as it could have a domino effect on other eurozone countries,” the central banking source asserted. “That in turn would put pressure on the euro and the euro is a prime concern.”

The source also seemed to hint that Greek debt, if hit by additional downgrades, could have trouble staying on the list of eligible collateral at ECB refinancing operations after next year, when
the current acceptable minimum rating of BBB- will revert to the pre-crisis standard of A-.

“We will have to take under consideration what will happen after 2010, when the temporary and more lenient stance of the ECB will stop,” he said.

“I don’t say that Greece is heading towards losing its eligibility for collateral,” he continued. “However, we always plan and assess how a situation will evolve in the medium-term, and there is a risk that some countries might be facing much more expensive borrowing conditions in the next two years, because of market conditions.”

The official added that, in the case of Greece, “if borrowing becomes even more expensive, it will create problems in its efforts to combat high debt and deficit.”

But he waxed optimistic, nonetheless. “Despite the fact that rating agencies are downgrading Greece, we do not believe that there will be a borrowing problem,” he said.

“We believe that the Greek government will adopt all necessary measures to satisfy not only the markets but also its EU allies and the ECB and work towards fiscal consolidation within the next four years.”


Posted in EU | No Comments »

Obama vision

Posted by WARREN MOSLER on 15th December 2009

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Yes, this is the essence of the Tea Party movement,

And so far the President has at best refrained from directly addressing these concerns.
At worst he’s been dismissive,
leaving the growing impression that indeed that is his vision,
even as his approval ratings plummet.


Posted in Obama, Political | 14 Comments »

Bill Dudley’s Speech

Posted by WARREN MOSLER on 15th December 2009

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>   (email exchange)
>   On Tue, Dec 15, 2009 at 8:36 AM, wrote:
>   I was reading Bill Dudley’s speech from last week and can’t figure out why he’s saying
>   some things that are at best misleading.
>   Mr. Dudley’s overall remarks were interesting, helpful and encouraging in many ways,
>   but I was quite concerned by what he said towards the end about excess reserves:

“If we raise the interest rate on excess reserves, we can incentivize banks to hold the excess reserves with us rather than lend them out”

>   It’s difficult to make sense of this statement, because banks, in the aggregate, don’t in
>   effect “lend” or “not lend” excess reserves. I realize that there is a lot of confusion in
>   the financial press surrounding the issue of excess reserves. Unfortunately, Mr. Dudley’s
>   choice of words seems likely to perpetuate some of these misunderstandings and also
>   seems inconsistent with Fed staff papers on this matter.
>   In the hope that it might prove useful at some point, I would like to offer the following
>   assertions:
>   1. In our system, banks are never reserve-constrained in their lending activities – the
>   Fed will always add as many reserves as are needed to maintain its interest rate target.

Yes, and more so. If the Fed doesn’t proactively add reserves to alleviate a shortage the result is an overdraft in at least one member bank’s reserve account, and an overdraft *is* a loan from the Fed, so in any case needed reserves are necessarily added as an ‘automatic’ matter of accounting. The Fed’s decision is about pricing the overdraft.

So it’s always about price and not quantity.

>   Bank lending decisions are independent of reserves.

Yes, completely.

>   2. Now that the Fed is paying interest on excess reserves, their quantity is irrelevant –
>   monetary policy objectives can be pursued completely independently from any
>   accounting measure of excess reserves in the system.

Yes, apart from a small glitch- the agencies have reserve accounts that don’t earn interest. The Fed is on this and working to get it changed so all reserve accounts pay interest.

>   3. The private sector cannot create or extinguish reserves. See Fed paper



Posted in Banking, Fed | 6 Comments »

Iraq to increase crude production

Posted by WARREN MOSLER on 15th December 2009

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This would be a game changer if they do it and pump all that:

BAGHDAD, Dec 14, 2009

Iraq struck deals with several foreign energy giants to nearly triple its oil output in an auction that ended on Saturday, as the country bids to become one of the world’s biggest energy producers.

Major agreements were reached with Russian firm Lukoil and Anglo-Dutch company Shell over giant fields during the two-day sale, while contracts were also awarded to China’s CNPC and Malaysia’s Petronas.

“Iraq’s oil production will reach 12 million barrels per day (bpd) within the next six years,” Oil Minister Hussein al-Shahristani told reporters after the auction. “That is the highest production level of the world’s oil-producing countries.”


Posted in Comodities | 4 Comments »