The Center of the Universe

St Croix, United States Virgin Islands

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 June, 2010

OPEC June Crude Output Down 157,000 Bbl/Day to 29.23 Mln

Posted by WARREN MOSLER on 30th June 2010

With the saudis setting price and letting quantity adjust looks like net demand isn’t going anywhere

Europe got by the ‘rollover event’ without drama.

German unemployment down a tad and muddling through.

Euro solvency issues (slowly) fading with ECB in control?

OPEC June Crude Output Down 157,000 Bbl/Day to 29.23 Mln

Posted in Comodities, Oil | No Comments »

Euro Central Banks Step Up Bond Buying, Traders Say

Posted by WARREN MOSLER on 29th June 2010

Euro Central Banks Step Up Bond Buying, Traders Say

By Paul Dobson

June 29 (Bloomberg) — Euro-region central banks stepped up purchases of Greek, Portuguese and Irish government securities today, traders said, deepening efforts to support the region’s bond market in the wake of the sovereign-debt crisis.

The purchases focused on maturities of five years and below, with some buying interest also shown for longer-maturity Greek bonds, said the traders, who declined to be identified because the transactions are confidential. The extra yield, or spread, investors demand to hold the nations’ securities instead of benchmark German debt narrowed.

The European Central Bank took the unprecedented decision to start buying government bonds last month to help the European Union contain the Greek debt crisis. The ECB said yesterday it bought 4 billion euros ($5 billion) of bonds last week, taking the total purchases as of June 25 to 55 billion euros. Greek debt spreads had been widening, approaching their levels before the EU rescue was announced in early May, amid speculation funds that track bond indexes were selling the debt.

Central banks “are more active than they have been of late,” said Huw Worthington, a fixed-income strategist at Barclays Capital in London. “There has been a lot of volatility in a lot of the spreads, and some concerns of selling ahead of the month end.”

Greek two-year notes rose, sending the yield down 41 basis points to 10.19 percent as of 3:43 p.m. in London. The yield spread with German two-year notes fell 39 basis points to 1001 basis points. The yield on 10-year Greek bonds fell 41 basis points to 10.57 percent.

Greek securities will leave indexes managed by Citigroup Inc., Barclays Plc and the Markit iBoxx index at the end of this month after they were downgraded to junk by Moody’s Investors Service, potentially triggering sales by managers in so-called passive funds.

The Irish two-year bond yield fell 11 basis points to 2.88 percent and equivalent-maturity Portuguese yields dropped nine basis points to 3.61 percent.

Posted in CBs, ECB, EU | 12 Comments »

ECB Purchases

Posted by WARREN MOSLER on 29th June 2010

ECB purchases of govt bonds for last week amounted to EUR 4 billion,
matching previous week and bringing total to EUR 55 billion:

Week     Purchases    Total
1           16.5            16.5
2           10.0            26.5
3           8.5              35.0
4           5.5              40.5
5           6.5              47.0
6           4.0              51.0
7           4.0              55.0

That’s a lot of greek bonds, presumably the ECB is buying enough to support rates sufficiently so they can refi themselves.

Posted in ECB, EU | 5 Comments »

PCE/Personal Income

Posted by WARREN MOSLER on 28th June 2010

Very good, looks like continuing muddling through with moderate growth unemployment drifting lower in a few months when there are no more hours to add to the existing labor force.

Welcome to Japan, Mr. US bond market?

Ok market for stocks, especially with Euro zone risk fading. Just China h2 risk left, seems.

Karim writes:

PCE data today was encouraging and showed the positive impact of hours on labor income.

Personal income up 0.4% with wage and salary income up 0.5%.

Personal spending up 0.3% and headline deflator unchanged, so strong advance in real consumption spending.

For all the slowdown fears, real private sector demand will be stronger in Q2 than Q1.

Core deflator up .162%, largest advance in 7mths. Recent divergence from core CPI (PCE data has been firmer) reflective of lower weight of housing in PCE data.

Not saying inflation is picking up, just that deflation fears seem overblown.

Posted in Economic Releases, Equities | 6 Comments »

Warning- massive euro zone equity rally alert

Posted by Sada Mosler on 26th June 2010

If I’m right about the ECB having moved to support the debt of the national governments as well as the banking system, look for a blow out equity rally as markets come to understand this new policy means the national government solvency issues are over.

A muddle through economy is sufficient to drive an equity rally for a market that’s pricing in a relatively high probability of default risk.

Posted in ECB | 9 Comments »

EU Daily- The EU is on a financially sustainable path

Posted by Sada Mosler on 25th June 2010

Still looks like the strategy for Europe could be functionally very close to my proposal, and fiscally sustainable if they continue on the current path.

This is just inference on my part- I have no information other than what I’ve read online.

The ‘distributions’ the ECB will make will be via buying enough national govt debt in the secondary markets to keep the national govs solvent and able to fund their deficits, at least in the short term markets.

If they determine any member nation is not complying to their liking, they will start threatening to stop buying their debt, thereby isolating them from the ECB credit umbrella, while allowing the remaining nations to remain solvent.

ECB spending on anything is not (operationally) revenue constrained as the member nations are, so this policy is nominally sustainable.

The austerity measures will result in lower growth, and maybe even negative growth, but the solvency issue is gone as long as this policy is followed.

With currency strength and inflation ultimately a function of fiscal balance, the fundamental forces in place that drove the euro to 1.60 vs the dollar remain in place, while the mechanism to remove the default risk that drove the portfolio shifts that weakened the euro is in place.

While restructuring risk remains, it need not be forced by solvency risk. So restructuring need not happen.

Power has shifted to the ECB, presumably under substantial influence of the national govt finance ministers, as the ECB directly or indirectly moves to fund the entire banking system and national govt. deficits.

This is an institutional structure that is fully sustainable financially, with the economic outcome a function the size of the national govt. deficits they allow.

The conflict will remain the money interests in Europe who put currency strength as a priority, vs the exporters who favor currency weakness.

The consensus will be that unions and wages in general must be controlled.

Again, I do not know for sure that the ECB is actually moving in this direction.
They may not be.

Watch closely to see if the buying of national govt. securities remains sufficient to keep the national govts solvent.

(Feel free to distribute)


Europe Rebound Stalls in June on Market Strains, Eurocoin Shows
Barroso Says European Leaders Want to Keep Euro ‘Very Strong’
Schaeuble Says Europe Will Meet Deficit Targets, Corriere Says
Merkel faces test in vote for president
Berlin hints at move on pay deal ruling
Germany Trims 3rd-Quarter Debt Sales, Plans Bigger Cuts in 4th
Germany Faces Shortage of Skilled Workers in 2025, Study Says
French Economy Slowed to a Crawl in First Quarter of 2010
French Jobless Claims Increase as Companies Trim Workforces
Lagarde Says Pension Reform Is Priority, Sees AAA Rating Safe
Confindustria Raises Italian GDP Growth Forecast on Euro Drop
Spanish May Producer Prices Advance Most in 19 Months on Oil
Spain May Cut 426-Euro Unemployment Subsidy, Cinco Dias Reports
Greek optimistic on budget deficit reduction


Europe Rebound Stalls in June on Market Strains, Eurocoin Shows

(Bloomberg) The euro-area economic recovery stalled in June for a third month amid financial-market “strains.” The Eurocoin index measuring economic expansion in the 16 nations that share the single currency fell to 0.46 percent from 0.55 percent in May, the Center for Economic Policy Research and the Bank of Italy, which co-produce the index, said in a statement. “Recent strains in the financial markets have affected the performance of the indicator,” according to the statement. The index “has however been supported by the new improvement in foreign trade.” The index, which includes business and consumer confidence readings, industrial production, price figures and stock-market performance, aims to provide a real-time estimate of economic growth, according to the report.

Barroso Says European Leaders Want to Keep Euro ‘Very Strong’

June 25 (Bloomberg) — European Commission President Jose Barroso said the region’s leaders are determined to keep the euro a “very strong” currency.

“I have no doubts of the absolute determination of European Union leaders and European Union institutions to keep the euro as a very strong and stable currency,” Barroso said in an interview with Bloomberg Television in Toronto, where he is attending a meeting of leaders from Group of 20 countries.

Against the U.S. dollar, the euro has fallen 19 percent since its Nov. 25 high, trading yesterday at $1.2279 after reaching a four-year low of $1.1877 on June 7.

The 16-nation currency’s “real effective exchange rate has lost close to 10 percent” since its peak in October, the European Commission, the EU executive, said yesterday in its quarterly assessment of the euro-region economy.

The continent’s economic “fundamentals” are good, and Europe’s debt and deficits are smaller than some of its “main partners,” Barroso said, adding investors have been reassured by an almost $1 trillion plan by the euro nations and the International Monetary Fund to backstop the sovereign debt of the region’s weakest members.

It’s “a very important message of confidence that is being conveyed to markets as well,” Barroso said.

Barroso also said that China’s plan to provide more currency flexibility was a “move in the right direction” that increases confidence in the global economy.

Earlier yesterday, Barroso said that exit strategies from fiscal stimulus programs should be gradual, differentiated and “growth-friendly.”

Schaeuble Says Europe Will Meet Deficit Targets, Corriere Says

June 25 (Bloomberg) — German Finance Minister Wolfgang Schaeuble said he has “no doubt” that European governments will hold to their commitments to cut public deficits, Corriere della Sera reported, citing an interview.

“Too-high deficits have to be responsibly reduced,”

Corriere quoted Schaeuble as saying. “We have a shared agreement, and I have no doubt that all will abide by their commitments.”

Merkel faces test in vote for president

(FT) The presidential election – in a specially constituted federal assembly – represents the biggest challenge for Angela Merkel since she formed a government in October combining her own Christian Democratic Union with the liberal Free Democratic party. The combined popularity of the coalition parties has since dropped from 48.4 per cent to 35 per cent, according to a poll published by Stern magazine and the RTL television network. The proportion of voters saying they would vote again for Ms Merkel as chancellor has also dropped to just 39 per cent, her lowest rating for more than three years, according to a Forsa institute poll. Political scientists believe that if Christian Wulff, Ms Merkel’s candidate for the presidency, were to lose the vote on Wednesday to Joachim Gauck, the non-party candidate supported by the SPD and Greens, it could force the resignation of both the chancellor and her government.

Berlin hints at move on pay deal ruling

(FT) The German government on Thursday signalled it was considering legislation to quell protests from both company chiefs and worker representatives over a court ruling that threatens the way they agree wage deals. Judges in Erfurt, eastern Germany, on Wednesday ended a 50-year-old practice of extending in-house wage deals made between an employer and its biggest union to cover all workers in the company doing similar jobs. The judges agreed with a doctor at a hospital in Mannheim who had demanded he be paid according to the national pay deal of the doctors’ union, not the in-house deal agreed by services union Verdi. They said in their verdict that established wage-bargaining practices contravened the right of citizens freely to form alliances. There was no “basic principle” forcing a company “to adopt a uniform wage deal”, they declared.

Germany Trims 3rd-Quarter Debt Sales, Plans Bigger Cuts in 4th

(Bloomberg) Germany will sell 77 billion euros ($94.5 billion) of bonds and bills in the third quarter, 2 billion euros less than forecast in December. A larger adjustment will come in the fourth quarter, assuming the economy stays steady, a finance ministry official said. Finance Minister Wolfgang Schaeuble has pledged to cut net new borrowing by the end of the year. A federal issuance calendar released in December said gross debt sales this year would be a record 343 billion euros ($421.5 billion). The third-quarter debt issuance includes 44 billion euros of bonds and 33 billion euros of bills. Schauble’s ministry said on June 22 that the so-called structural budget deficit will be 53.2 billion euros this year, 13.4 billion euros less than the 66.6 billion euros originally expected. It also said then that net new borrowing this year will be 15 billion euros below the 80.2 billion euros in the 2010 budget plan.

Germany Faces Shortage of Skilled Workers in 2025, Study Says

June 25 (Bloomberg) — Germany faces a shortage of skilled workers in 2025 as the population is shrinking, the Federal Labor Agency’s research institute said.

Due to demographic reasons the size of the German workforce will constantly decrease until 2025 while the number of employed in the services industry may rise by more than 1.5 million, the institute said in a study published yesterday.

By contrast, the number of employees in the manufacturing industry may fall by almost 1 million over the next 15 years, the study said.

German unemployment fell more than twice as much as economists forecast in May as exports from Europe’s biggest economy surged, bolstering the recovery. The number of people out of work declined a seasonally adjusted 45,000 to 3.25 million, the lowest since December 2008, the Labor Agency said June 1.

French Economy Slowed to a Crawl in First Quarter of 2010

Paris (dpa) — The French economy slowed alarmingly in the first quarter of 2010, with gross domestic product (GDP) expanding by only 0.1 per cent, the government’s statistics office Insee said Friday.

The primary reason for the poor result was a drop of 0.2 per cent in domestic demand, compared to an increase of 0.5 per cent in the last quarter of 2009, when GDP rose by 0.6 per cent.

This was the second bit of bad economic news for the government in less than 24 hours. Late Thursday, the Labour Ministry said that the rolls of unemployed had grown by some 22,600 in May, the largest rise in unemployment since the beginning of the year.

Some 2.7 million people were out of work at the end of May, an unemployment rate of 9.5 per cent.

French Jobless Claims Increase as Companies Trim Workforces

(Bloomberg) The number of jobseekers in France climbed in May as manufacturers trimmed payrolls in the wake of the country’s worst recession in more than half a century. The number of unemployed actively looking for work rose by 22,600 last month, an increase of 0.8 percent, the Labor and Finance Ministries said. The total number of jobseekers was 2.7 million. While claims have risen every month this year except in March, national statistics office Insee predicts the economy is about to begin creating jobs again for the first time in two years. “Total employment fell heavily in 2009, dragged down by the drop in activity,” Insee said late yesterday. “It should progress slightly over 2010 as a whole.”

Lagarde Says Pension Reform Is Priority, Sees AAA Rating Safe

June 25 (Bloomberg) — France’s plan to lift its retirement age is a signal to investors about the seriousness of President Nicolas Sarkozy’s intention to cut the budget deficit, Finance Minister Christine Lagarde said.

“The priority is to protect the retirement system,”

Lagarde said today on France Inter radio. “We are also trying to send a message of security to the markets.”

Sarkozy’s government set out proposals last week to raise the minimum age at which workers can tap the state pension to 62 in 2018 from 60 currently. The age at which full benefits are reaped is to rise to 67 from 65 under the plan, which labor unions protested yesterday.

France is the only country among Europe’s five biggest economies not to have presented a detailed savings plan for next year. Britain set out deficit-cutting measures totaling 113 billion pounds ($167 billion) earlier this week and Germany announced cuts of 81.6 billion euros ($101 billion) on June 7.

Sarkozy has committed to reducing the deficit from 8 percent of gross domestic product this year to 6 percent in 2011 and 3 percent in 2013.

Lagarde said “there’s no reason to think” that France’s AAA credit rating is threatened, though she said the country doesn’t have the luxury of time to debate the pension overhaul.

“We have time pressure, it’s not possible to delay,”

Lagarde said. “The public finance situation doesn’t allow for it. We need to take measures quickly.”

Sarkozy and Lagarde join leaders and finance ministers of the Group of Eight later today in Huntsville, Ontario, before meeting their Group of 20 counterparts tomorrow in Toronto.

Confindustria Raises Italian GDP Growth Forecast on Euro Drop

(Bloomberg) Italian gross domestic product will expand 1.2 percent this year and 1.6 percent in 2010, up from previous forecasts of 1.1 percent and 1.3 percent respectively, Confindustria said. The single currency’s 14 percent slide against the dollar this year will “more than offset” the impact of budget cuts worth 24.9 billion euros, which will shave 0.4 percentage points of GDP in 2011 and 2012, Confindustria said. Prime Minister Silvio Berlusconi’s deficit-curbing measures aim to reduce the budget deficit by an additional 1.6 percent of GDP, bringing the shortfall within the EU limit of 3 percent of GDP in 2012 from 5.3 percent last year.

Spanish May Producer Prices Advance Most in 19 Months on Oil

June 25 (Bloomberg) — Spanish producer-price inflation accelerated to the fastest in 19 months in May as higher oil prices boosted energy costs.

Prices of goods leaving Spain’s factories, mines and refineries rose 3.8 percent from a year earlier after a 3.7 percent increase in April, the National Statistics Institute in Madrid said today. That’s the biggest increase since October 2008. From the previous month, prices gained 0.2 percent.

Crude-oil prices rose 8 percent in the 12 months to the end of May, pushing up manufacturers’ costs. Still, with the economy continuing to shrink and the unemployment rate at 20 percent, consumer-price inflation remains restrained. Spain’s underlying inflation rate, which excludes volatile food and energy prices, turned negative in April for the first time on record.

The government forecasts the economy will contract 0.3 percent this year.

Spain May Cut 426-Euro Unemployment Subsidy, Cinco Dias Reports

June 25 (Bloomberg) — Spain’s Labor Minister Celestino Corbacho may cut a 426 euro-a-month ($525) subsidy paid to the unemployed whose two-year, contributions-based jobless benefit has run out, Cinco Dias reported.

The subsidy, which cost the state 1.2 billion euros since it was introduced last year, will be difficult to maintain after August as Spain tries to cut its deficit, the newspaper reported, citing an interview with Corbacho.

Greek optimistic on budget deficit reduction

(AP) Greece’s finance minister on Thursday voiced confidence that the country will meet or even surpass its ambitious targets to slash spending and boost revenues by the end of the year. “Have we won the bet? No,” George Papaconstantinou said. “But we have well-founded hopes and are optimistic that, for the first time in many years, at the end of the year the state budget will achieve or even exceed the targets we have set.” Papaconstantinou said his optimism was based on figures showing a 40 percent deficit reduction during the first five months of the year, as well an expected revenue boost from increased consumer taxes. On Friday the cabinet is set to approve a key draft law on pension and labor reforms. The government says the current pension system is not viable, and if left unchanged would come to absorb 24 percent of GDP in 2050, from the current 12 percent.

Posted in ECB, EU | 127 Comments »

World’s rich got richer amid ’09 recession

Posted by WARREN MOSLER on 25th June 2010

They call Obama a ‘socialist’ who’s taking from the rich and giving to the poor, but the facts show that instead he’s presided over the largest transfer of wealth from poor to rich in the history of the world.

GDP has been growing by around 4% for the last two quarters, while the lowest income people suffered through job loss and declining wage growth.

That means someone else got the increase in real wealth:

World’s rich got richer amid ’09 recession: report

By Joseph A. Giannone

June 22 (Reuters) — The rich grew richer last year, even as the world endured the worst recession in decades.

A stock market rebound helped the world’s ranks of millionaires climb 17 percent to 10 million, while their collective wealth surged 19 percent to $39 trillion, nearly recouping losses from the financial crisis, according to the latest Merrill Lynch-Capgemini world wealth report.

Stock values rose by half, while hedge funds recovered most of their 2008 losses, in a year marked by government stimulus spending and central bank easing.

“We are already seeing distinct signs of recovery and, in some areas, a complete return to 2007 levels of wealth and growth,” Bank of America Corp wealth management chief Sallie Krawcheck said.

The fastest growth in wealth took place in India, China and Brazil, some of the hardest hit markets in 2008. Wealth in Latin America and the Asia-Pacific soared to record highs.

Asia’s millionaire ranks rose to 3 million, matching Europe for the first time, paced by a 4.5 percent economic expansion.

Asian millionaires’ combined wealth surged 31 percent to $9.7 trillion, surpassing Europe’s $9.5 trillion.

In North America, the ranks of the rich rose 17 percent and their wealth grew 18 percent to $10.7 trillion.

The United States was home to the most millionaires in 2009 — 2.87 million — followed by Japan with 1.65 million, Germany with 861,000, and China with 477,000.

Switzerland had the highest concentration of millionaires: nearly 35 for every 1,000 adults.

Yet as portfolios bounced back, investors remained wary after a collapse that erased a decade of stock gains, fueled a contraction in the global economy and sent unemployment soaring.

The report, based on surveys with more than 1,100 wealthy investors with 23 firms, found that the rich were well served by holding a broad range of investments, including commodities and real estate.

“The wealthy allocated, as opposed to concentrated, their investments,” Merrill Lynch head of U.S. wealth management Lyle LaMothe said in an interview.

Millionaires poured more of their money into fixed-income investments seeking predictable returns and cash flow. The challenge ahead for brokers is convincing clients to move off the sidelines and pursue riskier, more fruitful investments.

“There is still a hesitancy,” LaMothe said. “Liquidity is incredibly important and people need cash flow to preserve their lifestyle — but they want to replace that cash flow in a way that does not increase their risk profile.”

The report found that investor confidence in advisers and regulators remains shaken. The rich are actively managing their investments, seeking customized advice and demanding full disclosure about the securities they buy.

There were signs that investors were shaking off their concerns. Families that kept money closer to home during the crisis began shifting money to foreign markets, particularly the developing nations.

North American and European investors are expected to increase their exposure to Asian markets, which are projected to lead the world in economic expansion. Europe’s wealthy are seen increasing their U.S. and Canadian holdings.

More wealthy clients also are taking a harder look at large companies that pay healthy dividends, as an alternative to bonds and their razor-thin yields.

“Investors are open to areas they hadn’t thought about before as they try to preserve their ability to be philanthropic, to preserve their lifestyle,” LaMothe said. “To me, the report underscored clients are involved and they’re not inclined to stay in 1 percent savings accounts.”

Posted in GDP, Government Spending, Obama | 1 Comment »

Clegg Says U.K. Deficit Cuts Intended to Avert ‘Market Panic’

Posted by WARREN MOSLER on 24th June 2010

Just in case you thought the new Deputy Prime Minister knows anything about monetary operations.

To avoid the non existent probability of becoming the next Greece they can take action to increase the real probability they become the next Japan:

Clegg Says U.K. Deficit Cuts Intended to Avert ‘Market Panic’

June 24 (Bloomberg) — Deputy Prime Minister Nick Clegg said the U.K. could have been the next victim of a “market panic” sweeping Europe if the government had not raised valued-added tax.

Defending Chancellor of the Exchequer George Osborne’s June 22 decision to raise the tax to 20 percent from 17.5 percent, which Clegg’s Liberal Democrats had campaigned against during for last month’s election, the deputy prime minister said the government faces a “black hole” in the public finances that is “even bigger than we thought.”

“The truth is that the world had changed very dramatically in recent weeks,” Clegg told BBC News today. “We’ve got this sort of economic firestorm on our doorstep in Europe, where the markets are putting huge pressure on one country after the next, knocking on the door in Greece, in Spain, in Portgual, and so on.”

“There’s a real worry that if we don’t take action now, that we will be the next victim, if you like, of that kind of market panic,” he said.

Posted in Currencies, Government Spending, UK | 8 Comments »


Posted by WARREN MOSLER on 24th June 2010

Still feels like modest GDP growth, positive but not enough to make much of a dent in unemployment, until the ‘hand off’ to growth from credit expansion from some other sector, which could be a while.

Risks remain external.

China has been a strong first half weak second half story for a while, and a weak second half after an only ok first half this year can be a problem.

Fiscal tightening around the world can also keep a lid on things.

And I still have that nagging feeling that a 0 rate policy requires higher budget deficits to sustain full employment than a policy of higher rates. That should be a good thing- means taxes can be that much lower- but with a govt that doesn’t understand its own monetary system and keeps fiscal too tight it’s a bad thing.

All seems to point to more of an L shaped, Japan like recovery than a V.

Karim writes:

Constructive data:

* Initial claims down 19k to 457k; Labor dept cited processing issues around Memorial Day holiday for elevated readings past couple of weeks

MKT NEWS:”A Labor analyst said the surge in the previous two weeks was apparently due to technical factors relating to the way new claims were distributed over the holiday and post-holiday weeks and to a pattern that departed from what the seasonal factors were prepared for.”

* Number receiving extended benefits at lowest since last December, suggesting some easing in ability to find a job

Durable goods orders ex-aircraft and defense up 2.1% last month and up 29% past 3mths at an annualized rate; Capex was the sector was the Fed was most upbeat on in their statement yesterday

Shipments ex-aircraft and defense up 1.6% m/m and 16.7% on a 3mth annualized rate

Posted in China, Employment, GDP, Government Spending | 9 Comments »

Comment on EU Daily

Posted by WARREN MOSLER on 24th June 2010

On Thu, Jun 24, 2010 at 7:37 AM, wrote:

you seem to be arguing that the fix is in for the eurozone. is that a correct read?

Yes, looks like it to me.

if so, then your expected rise in the euro could occur sooner rather than later.


seems to me that it will be difficult for the euro to rally anytime soon as central banks / portfolio managers trim their euro exposure on any strength.

Right, the portfolio shifting may not have run its course yet. That’s the risk. I’m thinking a sell off in gold, which went up this last bit due to euro fears, will signal the turn in psychology/reduction in euro fear.

With restructuring risk already on the table, seems it has to be mainly discounted in that anyone who can readily shift out of euro already have, and for those still holding euro financial assets they probably have euro liabilities and don’t want to add currency risk by shifting out of euro?

I suppose the real test will be the next mini funding crisis to see how the euro handles that stress.

Makes sense.

i’m getting fixated on the whole monetarists vs keynesian showdown that seems to be unfolding. in my mind the Greenspan era conditioned traders to believe that monetary policy was all powerful and the solution to every bump in the road. with rates near zero almost everywhere that impression will certainly fade.

And rightly so. The reality is sinking in that the Fed has no more meaningful tools, and the ones they thought they had can only help liquidity, and not support aggregate demand beyond keeping it from getting worse due to liquidity issues.

at the same time, the magnitude of the financial crisis and now the Greek crisis has seriously damaged the credibility of deficit spending.

Yes, for the wrong reasons, but I agree that’s the perception that’s driving policy.

so here we are with little faith in either concept and no clear sign anywhere of the handoff from public sector to private sector demand growth.

Right, that hand off traditionally comes from a return of private sector credit expansion, mainly housing and cars, which still hasn’t taken hold in this cycle. With all the demand leakages of unspent income due to pension funds, corp reserves, etc, some entity has to spend more than its income to make up for that.

I see a big test of theory coming in the next few years with little ammunition to proactively fight.

interesting times for sure.

Depressing, too.

I’d like to live during at least one period of true prosperity that’s ours for the taking in this time of abundant resources and geometrically expanding technology.

Posted in Deficit, ECB, EU | No Comments »

EU Daily | European Industrial Orders Increase for Third Month

Posted by WARREN MOSLER on 24th June 2010

As previously discussed, it is possible their deficits already got high enough and the euro low enough to support very modest growth when market forces intervened to stop further fiscal expansion.

One problem now is proactive cuts can set them back if a combination of private sector credit and exports doesn’t expand at the same time.

And expanding exports remains problematic as that would tend to strengthen the currency to the point where net exports remain relatively low, and there is nothing they can do to keep the euro down should that happen.

Another problem is the market forces that are working to limit their fiscal expansion will continue to hamper their ability to fund themselves, especially with continuing talk of ‘restructuring’ which, functionally, is a form of default.

I’ve read the ECB is now buying about 10 billion euro/week of national govt bonds in the secondary markets and ‘learning and demonstrating’ that it is not inflationary, doesn’t cause a currency collapse, and poses no operational risk to the ECB as some feared it might. As they all become ‘comfortable’ with this look for market forces to ‘force’ them to expand the buying geometrically as happened with their funding of their banking system, where much of the ‘risk’ is now at the ECB as they accept collateral for funding from their member banks that no one else will.

Operationally the ECB can fund the whole shooting match. And if they can address the moral hazard the usual way via the growth and stability pact, this time with the leverage of being able to threaten to cut off ECB funding to punish non compliance.

This ‘solution’ of the ECB buying national govt debt in the secondary markets is conceptually/functionally nearly identical to my proposal of per capita distributions to the national govts by the ECB. The difference is my proposal would not have ‘rewarded bad behavior’ as theirs does, but that’s a relatively minor consideration for them at the moment, and if they continue doing what they are doing, they have ‘saved the euro,’ even though having the ECB fund all the banks and national govts wasn’t their original idea of how it all would end up.

European Industrial Orders Increase for Third Month

Trichet Says Current Situation Requires ‘Credible Measures’

ECB’s Trichet Says Italian Budget Cuts Go in ‘Right Direction’

German debt agency asked to issue bonds

Schäuble defends German austerity

German Government Won’t Turn to Tax Cuts Amid Deficit Reduction

S&P’s Kraemer Sees No ‘Serious Risk’ of Euro Break Up

Merkel Defends Spending Cuts, Gets Backing From Trichet

Germany Sees Jobless Numbers at Under 3 Million

French Consumer Spending Gains on Signs Job Market Is Improving

French Economy to Expand 1.4% This Year on Exports, Insee Says

Zapatero Says Not Cutting Deficit Would Raise Interest Costs

Posted in Currencies, ECB, EU, Exports, Uncategorized | 2 Comments »

Town hall meetings suggestions

Posted by WARREN MOSLER on 23rd June 2010

The National Commission on Fiscal Sustainability is holding town hall meetings June 26, with an eye towards ‘fixing’ Social Security.

Here’s a suggested question for anyone attending:

‘I agree with statements by both Bernanke and Greenspan as well as David Walker from the Peterson Foundation that as a matter of monetary operations there is no solvency issue- the US always has the ability to make all dollar payments on a timely basis, regardless of revenues or deficits. And therefore there is no solvency issue regarding meeting all social security payments and medicare payments. Do you not agree with our Fed Chairman and the Chairman of the Peterson Foundation?”

David Walker’s recording is here.

Posted in Government Spending | 10 Comments »

Fox Video

Posted by WARREN MOSLER on 23rd June 2010

Posted in Deficit, GDP, Government Spending | 69 Comments »

Fox News Business

Posted by WARREN MOSLER on 22nd June 2010

Warren will be on Fox Business tomorrow morning at 9:30. Video to follow.

Posted in Deficit, Government Spending | 6 Comments »


Posted by WARREN MOSLER on 22nd June 2010

Good find!

I recommended this years ago when Karim first introduced me to his Treasury contacts.
It moved forward and was passed around for discussion, but the dealers quashed it.

An unlimited lending program could replace much of the generic libor swap market.

Wish they would revisit it.

Why Is the U.S. Treasury Contemplating Becoming a Lender of Last Resort for Treasury Securities?

“A backstop lending facility turns this understanding on its head: the Treasury would be issuing securities not because it needs cash, but because market participants need securities.”

They don’t notice a difference between gold standard and “modern money”, actually they draw a parallel:

“… the markets for borrowing and lending Treasury securities in the 21st century are broadly analogous to the 19th century market for borrowing and lending money. Dealers and other market participants today have short-term liabilities denominated in Treasury notes; 19th century banks had deposit liabilities. Additionally, there is limited elasticity in the supply of individual Treasury securities today, just as there was limited elasticity in the supply of base money in the 19th century. A backstop securities lending facility would enhance the elasticity of supply of Treasury securities in the same way that the Federal Reserve Banks enhanced the elasticity of currency a century ago. It would mitigate chronic settlement fails, just as the Federal Reserve System mitigated suspensions of convertibility of bank deposits.”

They don’t discuss interest on reserves (and they should, these being functionally equivalent to Tsy securities).

Posted in TREASURY | 8 Comments »

George Soros Speech

Posted by WARREN MOSLER on 21st June 2010

>   (email exchange)
>   On Mon, Jun 21, 2010 at 6:31 AM, wrote:
>   Soros’s recipe, FYI
>   much about bubbles,
>   also about how bad can be deficit reductions at this time

I usually don’t read or comment on Soros, but comments below this one time only for you.


George Soros Speech

Institute of International Finance, Vienna, Austria
June 10, 2010

In the week following the bankruptcy of Lehman Brothers on September 15, 2008 – global financial markets actually broke down and by the end of the week they had to be put on artificial life support. The life support consisted of substituting sovereign credit for the credit of financial institutions which ceased to be acceptable to counter parties.

As Mervyn King of the Bank of England brilliantly explained, the authorities had to do in the short-term the exact opposite of what was needed in the long-term: they had to pump in a lot of credit to make up for the credit that disappeared and thereby reinforce the excess credit and leverage that had caused the crisis in the first place. Only in the longer term, when the crisis had subsided, could they drain the credit and reestablish macro-economic balance.

Not bad, but he doesn’t seem to understand there is no ‘macro balance’ per se in that regard. He should recognize that what he means by ‘macro balance’ should be the desired level of aggregate demand, which is altered by the public sector’s fiscal balance. So in the longer term, the public sector should tighten fiscal policy (what he calls ‘drain the credit’) only if aggregate demand is deemed to be ‘too high’ and not to pay for anything per se.

This required a delicate two phase maneuver just as when a car is skidding, first you have to turn the car into the direction of the skid and only when you have regained control can you correct course.

It’s more like when you come to an up hill stretch you need to press harder on the gas to maintain a steady speed and if you get going too fast on a down hill section you need to apply the brakes to maintain a steady speed. And for me, the ‘right’ speed is ‘full employment’ with desired price stability.

The first phase of the maneuver has been successfully accomplished – a collapse has been averted.

But full employment has not been restored. I agree this is not the time to hit the fiscal brakes. In fact, I’d cut VAT until output and employment is restored, and offer a govt funded minimum wage transition job to anyone willing and able to work.

In retrospect, the temporary breakdown of the financial system seems like a bad dream. There are people in the financial institutions that survived who would like nothing better than to forget it and carry on with business as usual. This was evident in their massive lobbying effort to protect their interests in the Financial Reform Act that just came out of Congress. But the collapse of the financial system as we know it is real and the crisis is far from over.

Indeed, we have just entered Act II of the drama, when financial markets started losing confidence in the credibility of sovereign debt. Greece and the euro have taken center stage but the effects are liable to be felt worldwide. Doubts about sovereign credit are forcing reductions in budget deficits at a time when the banks and the economy may not be strong enough to permit the pursuit of fiscal rectitude. We find ourselves in a situation eerily reminiscent of the 1930′s. Keynes has taught us that budget deficits are essential for counter cyclical policies yet many governments have to reduce them under pressure from financial markets. This is liable to push the global economy into a double dip.

Yes, and this is an issue specific to govts that are not the issuers of their currency- the US States, the euro zone members, and govts with fixed exchange rates.

It is important to realize that the crisis in which we find ourselves is not just a market failure but also a regulatory failure and even more importantly a failure of the prevailing dogma about financial markets. I have in mind the Efficient Market Hypothesis and Rational Expectation Theory. These economic theories guided, or more exactly misguided, both the regulators and the financial engineers who designed the derivatives and other synthetic financial instruments and quantitative risk management systems which have played such an important part in the collapse. To gain a proper understanding of the current situation and how we got to where we are, we need to go back to basics and reexamine the foundation of economic theory.

I agree, see my proposals here.

I have developed an alternative theory about financial markets which asserts that financial markets do not necessarily tend towards equilibrium; they can just as easily produce asset bubbles. Nor are markets capable of correcting their own excesses. Keeping asset bubbles within bounds have to be an objective of public policy. I propounded this theory in my first book, The Alchemy of Finance, in 1987. It was generally dismissed at the time but the current financial crisis has proven, not necessarily its validity, but certainly its superiority to the prevailing dogma.

First we can always act to sustain aggregate demand and employment at desired levels across any asset price cycle with fiscal policy. No one would have cared much about the financial crisis if we’d kept employment and output high in the real sectors. Note that because output and employment remained high (for whatever reason) through the crash of 1987, the crash of 1998, and the Enron event, they were of less concern than the most recent crisis where unemployment jumped to over 10%.

Let me briefly recapitulate my theory for those who are not familiar with it. It can be summed up in two propositions. First, financial markets, far from accurately reflecting all the available knowledge, always provide a distorted view of reality. This is the principle of fallibility. The degree of distortion may vary from time to time. Sometimes it’s quite insignificant, at other times it is quite pronounced. When there is a significant divergence between market prices and the underlying reality I speak of far from equilibrium conditions. That is where we are now.

I’d say ‘equilibrium’ conditions are necessarily transitory at best under current institutional arrangements, including how policy is determined in Washington and around the world, and continually changing fundamentals of supply and demand.

Second, financial markets do not play a purely passive role; they can also affect the so called fundamentals they are supposed to reflect. These two functions that financial markets perform work in opposite directions. In the passive or cognitive function the fundamentals are supposed to determine market prices. In the active or manipulative function market prices find ways of influencing the fundamentals. When both functions operate at the same time they interfere with each other. The supposedly independent variable of one function is the dependent variable of the other so that neither function has a truly independent variable. As a result neither market prices nor the underlying reality is fully determined. Both suffer from an element of uncertainty that cannot be quantified.

Goes without saying.

I call the interaction between the two functions reflexivity. Frank Knight recognized and explicated this element of unquantifiable uncertainty in a book published in 1921 but the Efficient Market Hypothesis and Rational Expectation Theory have deliberately ignored it. That is what made them so misleading.

Reflexivity sets up a feedback loop between market valuations and the so-called fundamentals which are being valued. The feedback can be either positive or negative. Negative feedback brings market prices and the underlying reality closer together. In other words, negative feedback is self-correcting. It can go on forever and if the underlying reality remains unchanged it may eventually lead to an equilibrium in which market prices accurately reflect the fundamentals. By contrast, a positive feedback is self-reinforcing. It cannot go on forever because eventually market prices would become so far removed from reality that market participants would have to recognize them as unrealistic. When that tipping point is reached, the process becomes self-reinforcing in the opposite direction. That is how financial markets produce boom-bust phenomena or bubbles. Bubbles are not the only manifestations of reflexivity but they are the most spectacular.

Ok, also seems obvious? Now he need to add that the currency itself is a public monopoly, as the introduction of taxation, a coercive force, introduces ‘imperfect competition’ with ‘supply’ of that needed to pay taxes under govt. control. This puts govt in the position of ‘price setter’ when it spends (and/or demands collateral when it lends). And a prime ‘pass through’ channel he needs to add is indexation of public sector wages and benefits.

In my interpretation equilibrium, which is the central case in economic theory, turns out to be a limiting case where negative feedback is carried to its ultimate limit. Positive feedback has been largely assumed away by the prevailing dogma and it deserves a lot more attention.

Even his positive feedback will ‘run its course’ (not to say there aren’t consequences) for the most part if it wasn’t for the fact that the currency itself is a case of monopoly and the govt. paying more for the same thing, for example, is redefining the currency downward.

I have developed a rudimentary theory of bubbles along these lines. Every bubble has two components: an underlying trend that prevails in reality and a misconception relating to that trend. When a positive feedback develops between the trend and the misconception a boom-bust process is set in motion. The process is liable to be tested by negative feedback along the way and if it is strong enough to survive these tests, both the trend and the misconception will be reinforced.

Makes sense.

Eventually, market expectations become so far removed from reality that people are forced to recognize that a misconception is involved.

I’d say it’s more like the price gets high enough for the funding to run dry at that price for any reason? Unless funding is coming from/supported by govt (and/or it’s designated agents, etc), the issuer of the currency, that funding will always be limited.

A twilight period ensues during which doubts grow and more and more people lose faith but the prevailing trend is sustained by inertia.

‘Inertia’? It’s available spending power that’s needed to sustain prices of anything. The price of housing sales won’t go up without someone paying the higher price.

As Chuck Prince former head of Citigroup said, “As long as the music is playing you’ve got to get up and dance. We are still dancing.”

This describes the pro cyclical nature of the non govt sectors, which are necessarily pro cyclical. Only the currency issuer can be counter cyclical. Seems to me Minsky has the fuller explanation of all this.

Eventually a tipping point is reached when the trend is reversed; it then becomes self-reinforcing in the opposite direction.

The spending power- or the desire to use it- fades.

Typically bubbles have an asymmetric shape. The boom is long and slow to start. It accelerates gradually until it flattens out again during the twilight period. The bust is short and steep because it involves the forced liquidation of unsound positions. Disillusionment turns into panic, reaching its climax in a financial crisis.

The simplest case of a purely financial bubble can be found in real estate. The trend that precipitates it is the availability of credit; the misconception that continues to recur in various forms is that the value of the collateral is independent of the availability of credit. As a matter of fact, the relationship is reflexive. When credit becomes cheaper activity picks up and real estate values rise. There are fewer defaults, credit performance improves, and lending standards are relaxed. So at the height of the boom, the amount of credit outstanding is at its peak and a reversal precipitates false liquidation, depressing real estate values.

It all needs to be sustained by incomes. the Fed’s financial burdens ratios indicate when incomes are being stretched to their limits. The last cycle went beyond actual incomes as mortgage originators were sending borrowers to accountants who falsified income statements, and some lenders were willing to lend beyond income capabilities. But that didn’t last long and the bust followed by months.

The bubble that led to the current financial crisis is much more complicated. The collapse of the sub-prime bubble in 2007 set off a chain reaction, much as an ordinary bomb sets off a nuclear explosion. I call it a super-bubble. It has developed over a longer period of time and it is composed of a number of simpler bubbles. What makes the super-bubble so interesting is the role that the smaller bubbles have played in its development.

Fraud was a major, exaggerating element in the latest go round, conspicuously absent from this analysis.

The prevailing trend in the super-bubble was the ever increasing use of credit and leverage. The prevailing misconception was the believe that financial markets are self-correcting and should be left to their own devices. President Reagan called it the “magic of the marketplace” and I call it market fundamentalism. It became the dominant creed in the 1980s. Since market fundamentalism was based on false premises its adoption led to a series of financial crises.

Again, a financial crisis doesn’t need to ‘spread’ to the real economy. Fiscal policy can sustain full employment regardless of the state of the financial sector. Losses in the financial sector need not affect the real economy any more than losses in Las Vegas casinos.

Each time, the authorities intervened, merged away, or otherwise took care of the failing financial institutions, and applied monetary and fiscal stimuli to protect the economy. These measures reinforced the prevailing trend of ever increasing credit and leverage and as long as they worked they also reinforced the prevailing misconception that markets can be safely left to their own devices. The intervention of the authorities is generally recognized as creating amoral hazard; more accurately it served as a successful test of a false belief, thereby inflating the super-bubble even further.

‘Monetary policy’ did nothing and probably works in reverse, as I’ve discussed elsewhere. Fiscal policy does not have to introduce moral hazard issues. It can be used to sustain incomes from the bottom up at desired levels, and not for top down bailouts of failed businesses. Sustaining incomes will not keep an overbought market from crashing, but it will sustain sales and employment in the real economy, with business competing successfully for consumer dollars surviving, and those that don’t failing. That’s all that’s fundamentally needed for prosperity, along with a govt that understands its role in supporting the public infrastructure.

It should be emphasized that my theories of bubbles cannot predict whether a test will be successful or not. This holds for ordinary bubbles as well as the super-bubble. For instance I thought the emerging market crisis of 1997-1998 would constitute the tipping point for the super-bubble, but I was wrong. The authorities managed to save the system and the super-bubble continued growing. That made the bust that eventually came in 2007-2008 all the more devastating.

No mention that the govt surpluses of the late 90′s drained net dollar financial assets from the non govt sectors, with growth coming from unsustainable growth in private sector credit fueling impossible dot com business plans, that far exceeded income growth. When it all came apart after y2k the immediate fiscal adjustment that could have sustained the real economy wasn’t even a consideration.

What are the implications of my theory for the regulation of the financial system?

First and foremost, since markets are bubble-prone, the financial authorities have to accept responsibility for preventing bubbles from growing too big. Alan Greenspan and other regulators have expressly refused to accept that responsibility. If markets can’t recognize bubbles, Greenspan argued, neither can regulators–and he was right. Nevertheless, the financial authorities have to accept the assignment, knowing full well that they will not be able to meet it without making mistakes. They will, however, have the benefit of receiving feedback from the markets, which will tell them whether they have done too much or too little. They can then correct their mistakes.

Second, in order to control asset bubbles it is not enough to control the money supply; you must also control the availability of credit.

Since the causation is ‘loans create deposits’ ‘controlling credit’ is the only way to alter total bank deposits.

This cannot be done by using only monetary tools;

Agreed, interest rates are not all that useful, and probably work in the opposite direction most believe.

you must also use credit controls. The best-known tools are margin requirements

Changing margin requirements can have immediate effects. But if the boom is coming for the likes of pension fund allocations to ‘passive commodity strategies’ driving up commodities prices, which has been a major, driving force for many years now, margin increases won’t stop the trend.

and minimum capital requirements.

I assume that means bank capital. If so, that alters the price of credit but not the quantity, as it alters spreads needed to provide market demanded risk adjusted returns for bank capital.

Currently they are fixed irrespective of the market’s mood, because markets are not supposed to have moods. Yet they do, and the financial authorities need to vary margin and minimum capital requirements in order to control asset bubbles.

Yes, man is naturally a gambler. you can’t stop him. and attempts at control have always been problematic at best.

One thing overlooked is the use of long term contracts vs relying on spot markets. Historically govts have used long term contracts, but for business to do so requires long term contracts on the sales side, which competitive markets don’t allow.

You can’t safely enter into a 20 year contract for plastic for cell phone manufacturing if you don’t know that the price and quantity of cell phones is locked in for 20 years as well, for example. And locking in building materials for housing for 20 years to stabilize prices means less flexibility to alter building methods, etc. But all this goes beyond this critique apart from indicating there’s a lot more to be considered.

Regulators may also have to invent new tools or revive others that have fallen into disuse. For instance, in my early days in finance, many years ago, central banks used to instruct commercial banks to limit their lending to a particular sector of the economy, such as real estate or consumer loans, because they felt that the sector was overheating. Market fundamentalists consider that kind of intervention unacceptable but they are wrong. When our central banks used to do it we had no financial crises to speak of.

True. What the govt creates it can regulate and/or take away. Public infrastructure is to serve further public purpose.

But both dynamic change and static patterns have value and trade offs.

The Chinese authorities do it today, and they have much better control over their banking system. The deposits that Chinese commercial banks have to maintain at the People’s Bank of China were increased seventeen times during the boom, and when the authorities reversed course the banks obeyed them with alacrity.

Yes, and always with something gained and something lost when lending is politicized.

Third, since markets are potentially unstable, there are systemic risks in addition to the risks affecting individual market participants. Participants may ignore these systemic risks in the belief that they can always dispose of their positions, but regulators cannot ignore them because if too many participants are on the same side, positions cannot be liquidated without causing a discontinuity or a collapse. They have to monitor the positions of participants in order to detect potential imbalances. That means that the positions of all major market participants, including hedge funds and sovereign wealth funds, need to be monitored. The drafters of the Basel Accords made a mistake when they gave securities held by banks substantially lower risk ratings than regular loans: they ignored the systemic risks attached to concentrated positions in securities. This was an important factor aggravating the crisis. It has to be corrected by raising the risk ratings of securities held by banks. That will probably discourage loans, which is not such a bad thing.

My proposals, here, limit much of that activity at the source, rather than trying to regulate it, leaving a lot less to be regulated making regulation that much more likely to succeed.

Fourth, derivatives and synthetic financial instruments perform many useful functions but they also carry hidden dangers. For instance, the securitization of mortgages was supposed to reduce risk thru geographical diversification. In fact it introduced a new risk by separating the interest of the agents from the interest of the owners. Regulators need to fully understand how these instruments work before they allow them to be used and they ought to impose restrictions guard against those hidden dangers. For instance, agents packaging mortgages into securities ought to be obliged to retain sufficient ownership to guard against the agency problem.

One of my proposals is that banks not be allowed to participate in any secondary markets, for example

Credit default swaps (CDS) are particularly dangerous they allow people to buy insurance on the survival of a company or a country while handing them a license to kill. CDS ought to be available to buyers only to the extent that they have a legitimate insurable interest. Generally speaking, derivatives ought to be registered with a regulatory agency just as regular securities have to be registered with the SEC or its equivalent. Derivatives traded on exchanges would be registered as a class; those traded over-the-counter would have to be registered individually. This would provide a powerful inducement to use exchange traded derivatives whenever possible.

There is no public purpose served by allowing banks to participate in CDS markets and therefore no reason to allow banks to own any CDS.

Finally, we must recognize that financial markets evolve in a one-directional, nonreversible manner. The financial authorities, in carrying out their duty of preventing the system from collapsing, have extended an implicit guarantee to all institutions that are “too big to fail.” Now they cannot credibly withdraw that guarantee. Therefore, they must impose regulations that will ensure that the guarantee will not be invoked. Too-big-to-fail banks must use less leverage and accept various restrictions on how they invest the depositors’ money. Deposits should not be used to finance proprietary trading. But regulators have to go even further. They must regulate the compensation packages of proprietary traders to ensure that risks and rewards are properly aligned. This may push proprietary traders out of banks into hedge funds where they properly belong. Just as oil tankers are compartmentalized in order to keep them stable, there ought to be firewalls between different markets. It is probably impractical to separate investment banking from commercial banking as the Glass-Steagall Act of 1933 did. But there have to be internal compartments keeping proprietary trading in various markets separate from each other. Some banks that have come to occupy quasi-monopolistic positions may have to be broken up.

Banks should be limited to public purpose as per my proposals, here.

While I have a high degree of conviction on these five points, there are many questions to which my theory does not provide an unequivocal answer. For instance, is a high degree of liquidity always desirable? To what extent should securities be marked to market? Many answers that followed automatically from the Efficient Market Hypothesis need to be reexamined.

Also in my proposals, here.

It is clear that the reforms currently under consideration do not fully satisfy the five points I have made but I want to emphasize that these five points apply only in the long run. As Mervyn King explained the authorities had to do in the short run the exact opposite of what was required in the long run. And as I said earlier the financial crisis is far from over. We have just ended Act Two. The euro has taken center stage and Germany has become the lead actor. The European authorities face a daunting task: they must help the countries that have fallen far behind the Maastricht criteria to regain their equilibrium while they must also correct the deficinies of the Maastricht Treaty which have allowed the imbalances to develop. The euro is in what I call a far-from-equilibrium situation. But I prefer to discuss this subject in Germany, which is the lead actor, and I plan to do so at the Humboldt University in Berlin on June 23rd. I hope you will forgive me if I avoid the subject until then.

Posted in Banking, CBs, Currencies, Deficit, Government Spending, Interest Rates | 37 Comments »

Professor Bill Mitchell on inflation

Posted by WARREN MOSLER on 20th June 2010

Zimbabwe for hyperventilators 101

A very good read. Today’s hyper inflation fears due to ‘money printing’ are pure fear mongering.

My comment to Bill in support of his article:

Russia in 1998 is an example of how much the flat earth economists are wrong in what determines the value of a currency

Russia had a fixed fx rate of 6.45 rubles to the US dollar going into the August crisis.

At the end, rates on gko’s went to over 200% until there was no interest rate where holders of rubles did not want to cash them in at the CB for dollars. Dollar reserves were depleted, and no more dollars could be borrowed to support the currency.

Instead of simply floating the ruble and suspending conversion the CB simply shut down the payments system and the employees all walked out the door.

It was several months before the payments system was restarted.

There was no confidence, no faith, and no expectations of anything good happening.

The ruble went from 6.45 to about 28 or so in what has turned out to be a one time adjustment.

There was no hyper inflation, and not even much inflation as per Bill above, just a one time adjustment.

Pretty much the same for Mexico when it’s fixed fx regime blew up in the mid 90′s. The peso went from about 3.5 to 10 in a one time adjustment.

These are two examples of stress far in excess of whatever the US, Uk, and Japan could possibly face, yet with no actual inflationary consequences, as defined.

Posted in Currencies, Deficit, Inflation | 8 Comments »

China Yuan Pledge Suggests Peg to Dollar May Go

Posted by WARREN MOSLER on 20th June 2010

Reads to me like they don’t like the yuan strength vs the euro which means it could weaken vs the dollar if they buy euro instead of dollars as suggested below:

China Yuan Pledge Suggests Peg to Dollar May Go

June 19 (Bloomberg) — China’s central bank said it will allow a more flexible yuan after the nation cemented its economic recovery, indicating the currency’s 23-month- old peg to the dollar may be scrapped.

The yuan’s 0.5 percent daily trading band will remain unaltered, the central bank said in a statement on its website today.

“The central bank’s statement means China’s exit from the dollar peg,” saidZhao Qingming, an analyst at China Construction Bank in Beijing. “If the euro continues to remain weak, it could also mean that the yuan may depreciate against the dollar.”

Allowing the yuan to strengthen may curb inflation by reducing the cost of imported goods and limit the need for central bank dollar buying, which has left the nation with $2.4 trillion in currency reserves. A stronger Chinese currency may also help avert a trade war after U.S. lawmakers urged President Barack Obama to use the threat of trade sanctions to force a policy change.

“The global economy is gradually recovering,” the central bank said today. “The recovery and upturn of the Chinese economy has become more solid with the enhanced economic stability. It is desirable to proceed further with reform of the renminbi exchange rate regime and increase the renminbi exchange rate flexibility.”

The central bank was using another word for the yuan. The currency has been trading at about 6.83 per dollar since July 2008.

Posted in BRIC, China, Currencies | 5 Comments »

Greenspan in WSJ: U.S. Debt and the Greece Analogy

Posted by WARREN MOSLER on 18th June 2010

History will not be kind to the former Fed Chairman with regard to his understanding of monetary operations.

He understands solvency is not an issues which does seem to put him ahead of most. But he lacks a critical understanding of interest rate determination, particularly with regard to how the entire term structure of risk free rates is set by Fed policy (or lack of it), with US Treasury securities functioning to alter those risk free rates, and not funding expenditures per se:

“The U.S. government can create dollars at will to meet any obligation,
and it will doubtless continue to do so. U.S. Treasurys are thus free of
credit risk. But they are not free of interest rate risk. If Treasury
net debt issuance were to double overnight, for example, newly issued
Treasury securities would continue free of credit risk, but the Treasury
would have to pay much higher interest rates to market its newly issued

U.S. Debt and the Greece Analogy

By Alan Greenspan

June 18 (WSJ) —Don’t be fooled by today’s low interest rates. The
government could very quickly discover the limits of its borrowing capacity.

An urgency to rein in budget deficits seems to be gaining some traction
among American lawmakers. If so, it is none too soon. Perceptions of a
large U.S. borrowing capacity are misleading.

Despite the surge in federal debt to the public during the past 18
months-to $8.6 trillion from $5.5 trillion-inflation and long-term
interest rates, the typical symptoms of fiscal excess, have remained
remarkably subdued. This is regrettable, because it is fostering a sense
of complacency that can have dire consequences.

The roots of the apparent debt market calm are clear enough. The
financial crisis, triggered by the unexpected default of Lehman Brothers
in September 2008, created a collapse in global demand that engendered a
high degree of deflationary slack in our economy. The very large
contraction of private financing demand freed private saving to finance
the explosion of federal debt. Although our financial institutions have
recovered perceptibly and returned to a degree of solvency, banks,
pending a significant increase in capital, remain reluctant to lend.

Beneath the calm, there are market signals that do not bode well for the
future. For generations there had been a large buffer between the
borrowing capacity of the U.S. government and the level of its debt to
the public. But in the aftermath of the Lehman Brothers collapse, that
gap began to narrow rapidly. Federal debt to the public rose to 59% of
GDP by mid-June 2010 from 38% in September 2008. How much borrowing
leeway at current interest rates remains for U.S. Treasury financing is
highly uncertain.

The U.S. government can create dollars at will to meet any obligation,
and it will doubtless continue to do so. U.S. Treasurys are thus free of
credit risk. But they are not free of interest rate risk. If Treasury
net debt issuance were to double overnight, for example, newly issued
Treasury securities would continue free of credit risk, but the Treasury
would have to pay much higher interest rates to market its newly issued

In the wake of recent massive budget deficits, the difference between
the 10-year swap rate and 10-year Treasury note yield (the swap spread)
declined to an unprecedented negative 13 basis points this March from a
positive 77 basis points in September 2008. This indicated that
investors were requiring the U.S. Treasury to pay an interest rate
higher than rates that prevailed on comparable maturity private swaps.

(A private swap rate is the fixed interest rate required of a private
bank or corporation to be exchanged for a series of cash flow payments,
based on floating interest rates, for a particular length of time. A
dollar swap spread is the swap rate less the interest rate on U.S.
Treasury debt of the same maturity.)

At the height of budget surplus euphoria in 2000, the Office of
Management and Budget, the Congressional Budget Office and the Federal
Reserve foresaw an elimination of marketable federal debt securities
outstanding. The 10-year swap spread in August 2000 reached a record 130
basis points. As the projected surplus disappeared and deficits mounted,
the 10-year swap spread progressively declined, turning negative this
March, and continued to deteriorate until the unexpected euro-zone
crisis granted a reprieve to the U.S.

The 10-year swap spread quickly regained positive territory and by June
14 stood at a plus 12 basis points. The sharp decline in the euro-dollar
exchange rate since March reflects a large, but temporary, swing in the
intermediate demand for U.S. Treasury securities at the expense of euro

The 10-year swap spread understandably has emerged as a sensitive proxy
of Treasury borrowing capacity: a so-called canary in the coal mine.

I grant that low long-term interest rates could continue for months, or
even well into next year. But just as easily, long-term rate increases
can emerge with unexpected suddenness. Between early October 1979 and
late February 1980, for example, the yield on the 10-year note rose
almost four percentage points.

In the 1950s, as I remember them, U.S. federal budget deficits were no
more politically acceptable than households spending beyond their means.
Regrettably, that now quaint notion gave way over the decades, such that
today it is the rare politician who doesn’t run on seemingly costless
spending increases or tax cuts with borrowed money. A low tax burden is
essential to maintain America’s global competitiveness. But tax cuts
need to be funded by permanent outlay reductions.

The current federal debt explosion is being driven by an inability to
stem new spending initiatives. Having appropriated hundreds of billions
of dollars on new programs in the last year and a half, it is very
difficult for Congress to deny an additional one or two billion dollars
for programs that significant constituencies perceive as urgent. The
federal government is currently saddled with commitments for the next
three decades that it will be unable to meet in real terms. This is not
new. For at least a quarter century analysts have been aware of the
pending surge in baby boomer retirees.

We cannot grow out of these fiscal pressures. The modest-sized
post-baby-boom labor force, if history is any guide, will not be able to
consistently increase output per hour by more than 3% annually. The
product of a slowly growing labor force and limited productivity growth
will not provide the real resources necessary to meet existing
commitments. (We must avoid persistent borrowing from abroad. We cannot
count on foreigners to finance our current account deficit

Only politically toxic cuts or rationing of medical care, a marked rise
in the eligible age for health and retirement benefits, or significant
inflation, can close the deficit. I rule out large tax increases that
would sap economic growth (and the tax base) and accordingly achieve
little added revenues.

With huge deficits currently having no evident effect on either
inflation or long-term interest rates, the budget constraints of the
past are missing. It is little comfort that the dollar is still the
least worst of the major fiat currencies. But the inexorable rise in the
price of gold indicates a large number of investors are seeking a safe
haven beyond fiat currencies.

The United States, and most of the rest of the developed world, is in
need of a tectonic shift in fiscal policy. Incremental change will not
be adequate. In the past decade the U.S. has been unable to cut any
federal spending programs of significance.

I believe the fears of budget contraction inducing a renewed decline of
economic activity are misplaced. The current spending momentum is so
pressing that it is highly unlikely that any politically feasible fiscal
constraint will unleash new deflationary forces. I do not believe that
our lawmakers or others are aware of the degree of impairment of our
fiscal brakes. If we contained the amount of issuance of Treasury
securities, pressures on private capital markets would be eased.

Fortunately, the very severity of the pending crisis and growing
analogies to Greece set the stage for a serious response. That response
needs to recognize that the range of error of long-term U.S. budget
forecasts (especially of Medicare) is, in historic perspective,
exceptionally wide. Our economy cannot afford a major mistake in
underestimating the corrosive momentum of this fiscal crisis. Our policy
focus must therefore err significantly on the side of restraint.

Mr. Greenspan, former chairman of the Federal Reserve, is president of
Greenspan Associates LLC and author of “The Age of Turbulence:
Adventures in a New World” (Penguin, 2007).

Posted in Deficit, Government Spending, TREASURY | 23 Comments »

Estonia adopts the euro

Posted by WARREN MOSLER on 18th June 2010

We still contend that the world’s economic analysts do not understand the problem with the EMU mechanism, namely that there is no central fiscal authority that is allowed to credit accounts in an unlimited fashion. If you have doubts, please read the article below.

I mentioned when Estonia announced entry three weeks ago that if any sovereign really understood that they were giving up true ability to simply supply all the credits necessary in local currency, versus now having to tax or borrow before you spend (like municipalities), Estonia would not enter.

And please read the underlined portion of the article below. They still position the Euro mechanism weakness as “no policy fits all” or “there is no authority to distribute EU wide tax revenues collected”, or “there is no political union”. It all misses the point.

The U.S., Canada, Japan, Australia and UK do not borrow money. They drain excess reserves by issuing government securities so we can earn interest. Remember, when Japan allowed 30trn of excess reserves by not issuing government securities, the bill auctions were 200 times oversubscribed, even though the bills yielded only 2 or 3bps.

The mechanism is not fixed, the governments have limited resources for obligations, unless they allow the ECB or some other fiscal authority to have unlimited ability to credit accounts.

Thanks, Cliff


They also seem to equate a strong euro with economic prosperity.

What Crisis? The Euro Zone Adds Estonia

June 18 (NYT) —Guess what? The funniest thing happened in Europe on Thursday. A new country joined (yes, joined) the euro zone. And the mood here was upbeat.

With a debt crisis that appears to be spreading from Greece to Spain, membership for the country, Estonia, might seem more curse than blessing. There had been speculation that countries might abandon the single currency. And some doubt Estonia is even ready for the move.

“Maintaining low inflation rates in Estonia will be very challenging,” the European Central Bank warned last month.

Still, the euro remains among the strongest currencies in the world, and membership opens the door to a club with global influence. For small and unsure countries on the fringes of the European Union, it doesn’t get much better — no matter the mounting downsides for countries already on the inside.

“Joining the euro is a status issue for countries seeking to cement their position at Europe’s top table,” said Simon Tilford, the chief economist for the Center for European Reform, a research organization based in London. “But you also could call it sheer bloody-mindedness of Estonia to join now with the outlook for the currency so uncertain.”

Meeting in Brussels, Europe’s 27 governments hailed the “sound economic and financial policies” that had been achieved by Estonia in recent years. They said Estonia would shift from the kroon to the euro on Jan. 1, 2011.

For the leaders of the bloc, expanding the euro zone to 17 nations is tantamount to a show of confidence at an inauspicious time for the battered euro, which has lost about 13 percent of its value against the dollar since the beginning of the year.

“The door to euro membership is not closed because we are going through a sovereign debt crisis,” said Amadeu Altafaj, a spokesman for Olli Rehn, Europe’s commissioner for economic and monetary affairs. “Estonia’s admission is a sign to other countries that our aim is to continue enlarging economic and monetary union through the euro.”

With economic output of about $17 billion, the Estonian economy is tiny. Yet the country’s central bank governor, Andres Lipstok, will now be able to take a seat on the European Central Bank’s powerful council that sets interest rates.

Membership is also an important signpost that a country is on the way to achieving Western European standards of living, an important goal for a former Soviet republic like Estonia that has long been among the Baltic states eager to develop.

Perhaps most important, membership is recognition of the hard work and sacrifice it took to keep Estonia’s bid on track.

Estonia, along with Sweden, were the two countries with the smallest shortfalls between revenue and spending among all members of the 27-member European Union. Moreover, public debt in Estonia at 7.2 percent of gross domestic product is tiny compared with that of most other countries in the bloc.

“It’s a great day for Estonia,” Andrus Ansip, the Estonian prime minister, told Latvian state radio in an interview here.

“We prefer to be inside, to join the club, to be among decision makers.”

Estonia becomes the third ex-Communist state to make the switch to the euro, after Slovenia and Slovakia, but it is the first former Soviet republic to do so, sending a signal to other countries in Central and Eastern Europe that they, too, can aspire to membership.

That said, the euro zone is not expected to expand further for some time to come as other candidates like the Czech Republic, Hungary, Latvia, Lithuania, Bulgaria, Romania and Poland still fall short of the entry criteria partly because of their large budget deficits.

And the accession of Estonia will do little to erase the chief criticism of the euro project: that Europe’s nations are too economically disparate to maintain supranational institutions like a single currency in the long term.

Price stability is one of the main criteria for admission to the euro club. But in the past, political leaders have brushed off concerns from the European Central Bank about candidate nations in their eagerness to expand the euro zone.

Greece won admission even after the central bank reported in 2000 that the country’s debt equaled 104 percent of gross domestic product, far above the limit of 60 percent set out in the Maastricht Treaty. The bank said that Greek inflation met targets only because of declines in oil prices and other exceptional factors.

According to economists, the preparation to join the euro zone created some disadvantages for Estonia compared with neighboring countries, which have enjoyed a relative degree of flexibility by hanging on longer to their legacy currencies for now.

Now that Estonia is joining the euro zone, the most immediate advantages are likely to include greater interest from foreign investors and lower borrowing costs for both the public and private sectors.

But those could be short-term advantages. Estonia and its export-driven economy could be quickly overshadowed by financial difficulties, particularly if the euro zone remains unstable and if neighboring countries like Poland and its Baltic neighbors insist on hanging on to their currencies.

“Investors will only be willing to lend to Estonia on favorable terms if Estonia can continue to compete,” said Mr.

Tilford, the London economist. “That is where the biggest risks for Estonia now lie.”

And there is another downside, Mr. Ansip, the Estonian prime minister, said in the radio interview.

“Our banknotes are more beautiful than euro banknotes,” he said.

Posted in CBs, Currencies, Deficit, EU, Government Spending | 3 Comments »