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

Archive for August 17th, 2010

JN Daily | Gov’t Considering Addt’l Economic Stimulus

Posted by WARREN MOSLER on 17th August 2010

Good news on the proposed ‘stimulus’ even in the face of 200% type debt to GDP ratios.

Someone over there must get it?

They obviously don’t like the way the yen is going, which calls for deficit spending to reverse it.

(Budget deficits are like bumper crops, which put downward pressure on the price of the crop. Budget surpluses are like crop failures which do the reverse)

The off balance sheet way to deficit spend to weaken the yen is to buy fx, as they used to do, and, from the charts on their US Tsy holdings, they may currently be quietly doing just that.

The other way is to cut taxes to spur private sector demand, or increase govt spending to provide more public goods.

The exporters like the latter even though it does add to private sector demand some.

Japan Headlines,

Govt To Mull Extra Stimulus: Arai

Kan Says Govt Considering Additional Economic Stimulus

Inventory, Capital Spending Fall Short Of Economist Estimates

Forex: Dollar Remains in Lower Y85 Range in Tokyo on Weak US Data

Stocks: Nikkei Hits New 2010 Closing Low;Firmer Yen Trips Tech Shares

Bonds: JGB Yields At Multi-Year Lows On Views BOJ May Ease Policy

Govt To Mull Extra Stimulus: Arai

TOKYO (NQN)–Minister of Economy and Fiscal Policy Satoshi Arai said Tuesday the government will start discussing extra stimulus measures later this week.

“From around Friday, we’ll begin discussions on whether to implement (an additional pump-priming package),” Arai said in a speech at a Tokyo hotel that afternoon.

As for the need to compile a supplementary fiscal 2010 budget to finance the extra measures, “Prime Minister Naoto Kan will start hearing from ministries and agencies involved from Friday,” the minister said.

Kan Says Govt Considering Additional Economic Stimulus

TOKYO (Nikkei)–Prime Minister Naoto Kan said Monday that the government may offer another round of stimulus measures in a bid to underpin the economy.

On Monday, Kan instructed Minister of Economy and Fiscal Policy Satoshi Arai, Minister of Finance Yoshihiko Noda and Minister of Economy, Trade and Industry Masayuki Naoshima to examine the current economic conditions and report back with specific proposals.

Japan’s preliminary real gross domestic product showed a tepid 0.4% growth for the April-June quarter, while a strong yen and weak stocks threaten to derail the economic turnaround. “We need to closely monitor developments, along with currency conditions,” Kan told reporters at his official residence.

The stimulus steps could include extending such consumer spending incentives as the eco-point program for energy-saving electronics, which is set to expire at the end of December. Programs to support job-hunting graduates and measures to aid small and midsize businesses beleaguered by a strong yen are also believed to be in the works.

The government is expected to have around 900 billion yen in leftover funds in the fiscal 2010 budget originally earmarked for the economic crisis and regional revitalization. And an additional 800 billion yen of surplus money from the fiscal 2009 budget gives it a combined 1.7 trillion yen to fund additional stimulus.

But government officials are reluctant to increase bond issuances, citing concerns about the nation’s deteriorating finances.

(The Nikkei Aug. 17 morning edition)

Posted in Currencies, Deficit, Government Spending, Inflation, Japan | 23 Comments »

China reduces long term treasuries by record amount

Posted by WARREN MOSLER on 17th August 2010

Notice US Tsy yields fell to their lows even with China reducing holdings.
The fear mongerers will just tell us to thank goodness someone else came in to replace them, and that without the Fed buying it’s all over for the US, etc.
To which I say, it’s just a reserve drain, get over it!
And if you don’t understand that, try educating yourself before you sound off.

Interesting they are letting overseas banks invest in their bond markets.
Maybe a move to help strengthen their currency?
They can see the $ reserves aren’t coming in as before?
Or overseas banks bought their way in, looking to profit?
Or the next generation western educated Chinese thinks an expanded financial sector is a prerequisite to growth?
In any case, looks like another western disease has spread to China.

China Headlines,
China Threatened By Export Risk After Eclipsing Japan

China Reduces Long-Term Treasuries by Record Amount

China Economic Index Rises, Conference Board Says

China to Let Overseas Banks Invest in Bond Market

China Lags Behind on Key Measures After Surpassing Japan: Govt

Foreign Investment in China Climbs for 12th Month

Yuan Gains Most Since June as China Favors Greater Volatility

China Copper Consumption Growth to Slow, Antaike Says

Hong Kong Jobless Rate Slides to Lowest in 19 Months

Singapore Exports Cool as Government Predicts Slowing Demand

China Reduces Long-Term Treasuries by Record Amount

By Wes Goodman and Daniel Kruger

August 17(Bloomberg) — China cut its holdings of Treasury notes and bonds by the most ever, raising speculation a plunge in U.S. yields has made government securities unattractive.

The nation’s holdings of long-term Treasuries fell in June for the first time in 15 months, dropping by $21.2 billion to $839.7 billion, a U.S. government report showed yesterday. Two- year yields headed for a fifth monthly decline in August, falling today to a record 0.48 percent.

Two-year rates will rise to 0.85 percent by year-end as the U.S. economy rebounds in 2010 from a contraction in 2009, according to Bloomberg surveys of financial companies. Reports today will show improvement in housing and manufacturing, signs of stability even as growth is less than expected, analysts said.

“Buying now is a big risk,” said Hiroki Shimazu, an economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest publicly traded bank. “I don’t recommend it. The economy is stable.”

Investors who purchased two-year notes today would lose 0.4 percent if the yield projection is correct, according to data compiled by Bloomberg.

The economy will expand at a 2.55 percent rate in the last six months of 2010, according to the median of 67 estimates in a Bloomberg survey taken July 31 to Aug. 9, down from the 2.8 percent pace projected last month.

Housing, Production

China’s overall Treasury position fell for a second month in June to $843.7 billion.

“This may have been opportunistic,” said James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, one of 18 primary dealers that trade with the Federal Reserve. “Look at the level of yields. If you’ve held a lot of Treasuries, you’ve done well.”

The People’s Bank of China on June 19 ended a two-year peg to the dollar, saying it would allow greater “flexibility” in the exchange rate. The currency has since strengthened 0.5 percent.

The central bank limits appreciation by selling yuan and buying dollars, a policy that has contributed to its accumulation of the world’s largest foreign-exchange reserves and led to the build-up of its Treasury holdings.

Domestic Investors

Treasury yields fell as U.S. investors increased their holdings to 50.5 percent, the biggest share of the debt since August 2007 at the start of the financial crisis, amid signs that a recovery from the longest contraction since the Great Depression has lost momentum.

U.S. reports last week showed retail sales increased in July less than economists forecast and inflation held at a 44- year low.

The two-year note yielded 0.50 percent as of 12:19 p.m. in Tokyo. The 0.625 percent security due in July 2012 traded at a price of 100 7/32, according to data compiled by Bloomberg.

China, with $2.45 trillion in foreign-exchange reserves, turned bullish on Europe and Japan at the expense of the U.S.

The nation has been buying “quite a lot” of European bonds, said Yu Yongding, a former adviser to the People’s Bank of China who was part of a foreign-policy advisory committee that visited France, Spain and Germany from June 20 to July 2. Japan’s Ministry of Finance said Aug. 9 that China bought 1.73 trillion yen ($20.3 billion) more Japanese debt than it sold in the first half of 2010, the fastest pace of purchases in at least five years.

Diversification Strategy

“Diversification should be a basic principle,” Yu, president of the China Society of World Economy, said in an interview last week, adding a “top-level Chinese central banker” told him to convey to European policy makers China’s confidence in the region’s economy and currency. “We didn’t sell any European bonds or assets. Instead we bought quite a lot.”

China held 10 percent of the $8.18 trillion of outstanding Treasury debt as of July. Investors in Japan hold the second- largest position in Treasuries with $803.6 billion of the securities, or 9.8 percent. Total foreign holdings rose 1.2 percent to a record $4.01 trillion, the Treasury said. China’s holdings peaked in July 2009 at $939.9 billion.

China needs a strong U.S. dollar, said Kenneth Lieberthal, a senior fellow specializing in China at the Brookings Institution, a research group on Washington.

“I don’t think we’re going to see any massive flight from China’s holdings of U.S. debt,” Lieberthal said on Bloomberg Television. “That would be self defeating and they well recognize that.”

China to Let Overseas Banks Invest in Bond Market

August 17 (Bloomberg) — China will let overseas financial institutions invest yuan holdings in the nation’s interbank bond market in a pilot program to spur currency flows from abroad.

The People’s Bank of China will start with foreign central banks, clearing banks for cross-border yuan settlement in Hong Kong and Macau, and other international lenders involved in trade settlement, according to a statement on its website today.

“It’s a big boost for the offshore renminbi market,” said Steve Wang, a credit strategist for Bank of China International Securities Ltd. in Hong Kong. It “would allow offshore holders of yuan to invest the money directly in China rather than going through middlemen. It’s a step in the right direction that really opens the domestic securities market.”

The move comes as China seeks to broaden the use of its currency. The nation approved use of the yuan to settle cross- border trade with Hong Kong in June 2009, part of a drive to reduce reliance on the U.S. dollar. The popularity of that program was limited by the investments available in the currency.

Each overseas bank needs a special account at a local lender for debt transaction clearing, according to the regulations, which come into effect from today. Overseas banks must first apply for investment quotas on the interbank market, the central bank said. Foreign central banks should disclose funding sources and investing plans in their applications, according to the central bank.

There were a total 14.3 trillion yuan ($2.1 trillion) of bonds on the interbank market as of June, including debt issued by the central government, banks and companies, the central bank said July 30. That amount accounted for 97 percent of total debt outstanding.

Yuan Deposit Growth

Yuan deposits in Hong Kong climbed 4.8 percent in June to a record as China ended a two-year peg against the dollar. Currently, trade is the main way for offshore holders of yuan to return money to China, Wang said.

The program is a step forward to internationalization of the renminbi, said Dariusz Kowalczyk, a currency strategist at Credit Agricole CIB in Hong Kong. The Chinese currency, the yuan, is also known as the renminbi.

“By opening the new avenue to invest Chinese yuan funds, the currency will become more attractive and may come under further upward pressure in the offshore market in Hong Kong,” Kowalczyk said. “Foreign central banks may decide to begin the process of diversifying their reserves into Chinese yuan.”

Posted in Bonds, China, Currencies | 2 Comments »


Posted by WARREN MOSLER on 17th August 2010

Karim writes:

  • Core PPI stronger than expected at 0.3% m/m; now running 2.6% annualized over last 3mths
  • Core intermediate goods -0.4% and core crude -1.4%
  • Housing starts up 1.7% in July from downwardly revised level for June
  • Building permits down 3.1% for July
  • Non-residential construction will have a tough time contributing to Q3 growth due to the weak handoff from Q2

Biggest news is the PPI data; along with CPI data from last week, suggests some of the deflation fears may be overblown

Posted in Housing, Inflation | No Comments »