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

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.

Claims/DGO

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

Comment on EU Daily

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.

Yes.

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.

EU Daily | European Industrial Orders Increase for Third Month

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

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