Daily Archives: December 21, 2010 @ 10:30 am (Tuesday)

China Frets About Spreading EU Debt Woes

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Yes, they want to support the euro with their fx reserves to support their exports to that region, but there is no equivalent of US Treasury securities that they can hold.

It’s as if they could only buy US state municipal debt, and not Treasury secs, Fed deposits, and other direct obligations of the US govt with their dollars.

So the only way they can support exports to the euro zone is to take the credit risk of the available investments.

Now add to that their inflation problems.

The traditional export model is to suppress domestic demand with some type of tight fiscal policy, and then conduct fx purchases of the currency of the target export zone.

The euro zone does the tight fiscal but can’t do the fx buying, so the policy fails as the currency rises to the point net exports don’t increase.

China does the fx buying, but has also recently used state lending and deficit spending to increase domestic demand, which increases domestic prices/inflation, including labor, which works to weaken the currency and retard net exports.

So China fighting inflation and the euro zone fighting insolvency both look to keep aggregate demand down for 2011.

And I don’t see the deficit terrorists about to take their seats in the US Congress doing anything to increase aggregate demand either.

So all that and the Fed still failing to make much headway on either of its dual mandates, 30 year 0 coupon tsy’s at about 4.75% (and libor + as well) look like a pretty good place for a pension fund to get some duration and lay low, at least until there’s some visibility from the new US Congress.

China Frets About Spreading EU Debt Woes

By Langi Chiang

December 21 (Reuters) — China urged European authorities to back their tough talk with action on Tuesday by showing they can contain the euro zone’s simmering debt problems and pull the bloc out of its crisis soon.

China, which has invested an undisclosed portion of its $2.65 trillion reserves in the euro, said it backed steps taken by European authorities so far to tackle the region’s debt problems, but made clear it would like to see the measures having more effect.

“We are very concerned about whether the European debt crisis can be controlled,” Chinese Commerce Minister Chen Deming said at a trade dialogue between China and the European Union.

“We want to see if the EU is able to control sovereign debt risks and whether consensus can be translated into real action to enable Europe to emerge from the financial crisis soon and in a good shape,” he said.

Concerns that Europe’s debt problems will spread beyond euro zone’s periphery to engulf bigger economies such as Spain and Italy have weighed on global financial markets this year and taken a toll on the euro.

In part to protect its investments, China has repeatedly expressed its support for the single currency.

In October, Premier Wen Jiabao promised to buy Greek government bonds once Greece returned to debt markets, in a show of support for the country whose debt burden pushed the euro zone into a crisis and required an international bailout.

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Municipal Budget Cuts May Reduce U.S. GDP, Goldman Sachs Says

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The aspect that’s most relevant is the state deficit spending, including their capital accounts as well as operating accounts.

From what I’ve read, for this year they will have higher deficits than they will have next year, so that’s a negative for gdp.

If the simply tax less and spend less that means the population has that much more to spend than otherwise, and may or may not spend it, so that channel will reduce spending by the amount of the tax reduction the population doesn’t spend.

And increases in pension fund contributions by the states reduces spending that adds to gdp as well.

Municipal Cuts May Reduce GDP, Goldman Sachs Says

By Simone Baribeau

December 20 (Bloomberg) — Lower state and local spending,
which accounts for 12 percent of the national economy, may
reduce U.S. gross domestic product growth by about half a
percentage point next year, Goldman Sachs Group Inc. said.

Municipal budgets will likely increase by no more than 1
percent in 2011 after adjusting for inflation as local
governments receive less state aid and home-price declines put a
drag on property-tax collections, the bank said in a note to
clients. That is about 2 percentage points less than average.

“State and local governments will continue to face
substantial budget pressures for the time being,” wrote Andrew
Tilton, a New York-based economist, in the Dec. 17 note.
“Factors including, but not limited to, the lagged effect of
lower house prices will limit the growth of spending.”

Housing prices have fallen almost 30 percent since their
height in April 2006, according to the Case-Shiller 20-city
index. States, which will lose most federal stimulus funds next
year, are faced with closing $134 billion in budget gaps in
fiscal 2012, according to a Dec. 16 report of the Washington-
based Center on Budget and Policy Priorities. State tax
collections are 12 percent below pre-recession levels, the
report said.

Borrowing Costs

Municipal employment, which has fallen by about 2 percent
since late 2008 — compared with more than 5 percent in the
private sector — is likely to fall “a bit further” before
stabilizing in 2011, Goldman Sachs said. Large layoffs may be
avoided if localities raise real estate taxes to offset declines
in assessed property values, it said.

Municipalities are also likely to face higher borrowing
costs because of the potential end of the taxable Build America
Bonds program, which offers a 35 percent federal subsidy on
interest payments. Expiration of the program may cut the pool of
investors as borrowers revert to traditional tax-exempt issues,
boosting yields, Goldman Sachs said.

The Build America Bonds program wasn’t part of the $858
billion tax-cut plan the Senate passed last week. John Mica, the
Florida Representative who will head the House Transportation
and Infrastructure Committee next session, said last week he
planned to introduce a “reincarnation” of the program in 2011.

Goldman Sachs researchers boosted their economic growth
forecasts for 2011 and 2012 after Congress signed the tax plan.
The economy will grow 3.4 percent in 2011 and 3.8 percent in
2012, compared with previous estimates of 2.7 percent and 3.6
percent, the report said.

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