Posted by WARREN MOSLER on 7th October 2010
With a federal budget deficit of roughly $100 billion/month adding that much in savings (and income) to the economy total spending can be done with less additions to debt than when the deficit was a lot smaller.
Because of the deficit spending, consumers have been able to support maybe 2-3% growth in consumption and at the same time pay down credit cards and other debt, and debt continues to fall as a % of income as well.
Note below that new debt for non revolving credit has been inching up for the last 4 months, a sign that modest improvement continues.
With weekly initial claims now below 450,000 it looks like the spike to 500,000 most likely was some kind of statistical blip.
And at current levels, which seem to be drifting lower, we could be looking at 150,000- 200,000 new jobs per month.
This would mean the unemployment rate would fall only very slowly, but it’s still an upside surprise, and with 7 year treasury yields closing in on 7 year JGB’s we could also see US equity PE’s now around 12 adjust upward towards Japan’s PE’s of about 23.
I have no idea what’s going to happen with QE, except it will have very little or more likely no effect on the economy.
But there will be a lot of trading around the prospects and outcome of the Fed’s decision.
The term structure of risk free rates is always and in the Fed’s hands, and subject to the Fed’s reaction function and not to market forces. And with the talk of the Fed targeting longer term rates they may be coming around to it, as best I can tell knowledge of actual monetary operations seems to be slowly gravitating from the monetary operations staff to the actual leadership.
October 25 (Reuters) — Total U.S. consumer credit outstanding declined for the seventh straight month in August as credit card debt continued to fall.
The Federal Reserve said on Thursday total outstanding credit, which covers everything from car loans to credit cards, fell by $3.34 billion after dropping $4.09 billion in July.
Analysts polled by Reuters had forecast consumer credit contracting $3 billion in August.
So-called revolving, or credit-card credit, fell $4.99 billion in August after a $4.98 billion fall the prior month.
That marked the 24th consecutive month credit-card debt decreased.
Non-revolving credit, which includes closed-end loans for big-ticket items like cars, boats, college education and vacations, increased $1.65 billion after increasing $888.59 million in July. It was the fourth straight month of gains.
Posted in Deficit, Fed, Government Spending | No Comments »
Posted by WARREN MOSLER on 7th October 2010
Yes, as previously discussed, the ECB is now dictating terms and conditions to both the banking system and the national govts with regard to fiscal policy.
The fundamental structure of the eurozone includes no credible bank deposit insurance that now keeps the bank dependent on direct ECB funding. It also includes national govts that are in the position of being credit sensitive entities, much like the US states, only now with debt ratios far too high for their market status who are now directly or indirectly dependent on ECB support via bond purchases in the open market.
And there is no way out of this control for the banks or the national govts. There will be large deficits one way or another- through proactive fiscal expansion or through automatic stabilizers as attempts to reduce deficits only work to a point before they again weaken the economy to the point where the automatic stabilizers raise the deficits as the market forces ‘work’ to obtain needed accumulations of net euro financial assets.
This inescapable dependency has resulted in a not yet fully recognized shift of fiscal authority to the ECB, as they dictate terms and conditions that go with their support.
Yes, the ECB may complain about their new status, claim they are working to end it, etc. but somehow I suspect that deep down they relish it and announcements to the contrary are meant as disguise.
In the mean time, deficits did get large enough the ‘ugly way ‘in the last recession to now be supportive of modest growth. And even the 3% deficit target might be enough for muddling through with some support from private sector credit expansion which could be helpful for several years if conditions are right.
Also, dreams of net export expansion are likely to be largely frustrated as the conditions friendly to exports also drive the euro higher to the point where the desired increases don’t materialize. And the euro buying by the world’s export powers, though welcomed as helping finance the national govts., further supports the euro and dampens net exports.
By Gabi Thesing and Matthew Brown
October 7 (Bloomberg) — European Central Bank President Jean- Claude Trichet staked his reputation on propping up banks with cheap cash during the financial crisis. Now credit markets won’t let him take away that support.
Near-record borrowing costs for nations across the euro region’s periphery are making it harder for the ECB to wean commercial banks off the lifeline it introduced two years ago.
The extra yield that investors demand to hold Irish and Portuguese debt over Germany’s rose last week to 454 basis points and 441 basis points respectively. Spain’s spread hit a two-month high.
The risk for the ECB is that it gets pulled deeper into helping the banking systems of the most indebted nations in the 16-member euro bloc. Governing Council member Ewald Nowotny said Sept. 6 that addiction to ECB liquidity is “a problem” that “needs to be tackled.” Complicating the ECB’s task is that interbank lending rates have risen, tightening credit conditions and making access to market funding more expensive for banks.
“The ECB is trapped and the exit door is blocked,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “The state of credit markets is going to force them to stay in crisis mode for longer than some of them would like.”
The ECB’s 22-member Governing Council convenes today in Frankfurt. Policy makers will set the benchmark lending rate at a record low of 1 percent for an 18th month, according to all 52 economists in a Bloomberg News survey. That announcement is due at 1:45 p.m. and Trichet holds a press conference 45 minutes later.
Posted in ECB, EU, Exports, Government Spending | 9 Comments »
Posted by WARREN MOSLER on 7th October 2010
This story was abstracted from a long phone interview a couple of days ago and is reasonably well reported.
It was a follow up to my last interview with them when the euro was 119.
At the time all forecasts there were seeing were for it to keep going down.
Unreported was the part of the discussion reviewing that the traditional export model keeps fiscal tight enough to keep domestic demand relatively low, and at the same time buys fx to prevent currency appreciation and keep real costs down to help the exporters. And that the ECB has an ideological constraint against buying US dollars, in that building dollar reserves would give the appearance of the dollar backing the euro, when they want the euro to be a reserve currency.
(And interesting that they kept my name out of the title.)
By Antonia Oprita
October 7 (CNBC) — The euro will keep rising and will likely end the year at up to $1.50, as the European Central Bank pursues a highly deflationary policy, despite buying euro-denominated bonds, economist Warren Mosler, founder and principal of broker/dealer AVM, told CNBC.com.
Mosler, who predicted that the euro would bounce back towards $1.60 in June, when the single European currency was trading at around $1.19, said there was nothing to stop the euro’s [EUR=X 1.3965 0.0036 (+0.26%) ]appreciation versus the dollar, short of a policy response from the European Central Bank.
“If it (the euro) keeps going at the rate it’s going, it could go to $1.45-$1.50 by the end of the year,” he said.
The ECB started buying government bonds belonging to distressed euro zone members such as Greece, Ireland, Portugal and Spain to ease market concern regarding these countries’ ability to fund themselves and some analysts have said the measure may be inflationary.
But the policy is, if anything, deflationary because it is accompanied by tough austerity conditions, Mosler said.
“They’re causing a shortage of euros by requiring governments to rein in spending. It’s a highly deflationary move and that’s what is driving the euro higher,” he said.
“Right now the ECB and the euro zone are tightening up their supply of euros.”
Billionaire investor George Soros accused Germany earlier this week ofdragging the euro zone in a deflationary spiral by promoting austerity measures.
Many analysts have said that the ECB is promoting policies that go hand in hand with the euro zone’s biggest member’s fears of inflation.
One element of uncertainty is the ECB’s willingness to continue to buy government bonds, Mosler warned.
“No-one knows how long the ECB are going to do it… they could change their mind tomorrow,” he said.
But market speculators, while being able to attack the euro zone’s weakest members, will not be able to speculate against the central bank, which can print money and distribute it among its members at any time, Mosler said.
“The markets cannot punish the ECB. They can’t punish the issuer of the currency,” he said. “When you’re the issuer of a modern currency, you can credit an account and there’s nothing the market can do about it.”
He reiterated his view that the ECB has now de facto shifted to deciding fiscal policy for the countries in the single currency area, since their help by buying bonds comes with conditions regarding cutting debt and budget deficits.
Another factor behind the euro’s appreciation will be China’s announcement that it will buy Greek debt, which was hailed in Europe as proof of confidence in Greece’s ability to pay its debt.
“China would like nothing more than to buy euros – they’re doing it through buying Greek debt. That’s just one more force for a stronger euro,” Mosler said.
Posted in ECB, EU | 2 Comments »