Monthly Archives: December 2010

Data Recap from Karim

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Karim writes:

The overall income numbers held up well for November despite the weak payroll number; momentum building for consumer spending; capex staged solid rebound

  • Personal income up 0.3%
  • Real disposable income (after inflation and taxes) up 0.2%
  • Personal spending up 0.3% and up 3.8% last 3mths annualized
  • Core PCE deflator 0.1% and 0.8% y/y
  • Capital goods orders ex-aircraft and defense rebound 2.6%; prior month revised from -4.5% to -3.6%
  • Initial claims drop 3k to 420k

Belgian Business Confidence survey chart attached-Considered a very good proxy for Euro-wide economic activity.

Interesting that unlike wobble after sovereign debt pressures picked up in May, activity has surged higher in Q4 (data just released was for December).

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Kucinich

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pitiful stupidity/ignorance of monetary operations.

Very good post/critique by Bill on same goes into more detail:

http://bilbo.economicoutlook.net/blog/?p=12866

On Thu, Dec 23, 2010 at 10:55 AM, Scott Fullwiler wrote:
 

http://www.scribd.com/doc/45753797/NEED-ACT
 

Kucinich wants to end “private money creation” by banks or anyone else.
 

“Sec. 102. Unlawful for Persons to Create Money.
Any person who creates or originates United States money by lending against deposits, through so-called fractional reserve banking, or by any other means, after the effective date shall be fined under Title 18, United States Code, imprisoned for not more than 5 years, or both.”

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LDP Plans for ‘X-Day’ Japan Bond Crash It Blames on Kan Spending

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So seems they see the fear mongering about the deficit work to get politicians elected in the US and are trying same in Japan.

This kind of near universal ignorance will only make things worse, of course.

The only hope is that somehow an understanding of actual monetary operations takes over but so far no signs of any inroads at the political level or in mainstream economics.

LDP Plans for ‘X-Day’ Japan Bond Crash It Blames on Kan Spending

By Sachiko Sakamaki and Takashi Hirokawa

December 22 (Bloomberg) — Japan’s opposition said Prime Minister Naoto Kan’s spending plans are increasing the risk that the nation’s 858 trillion yen ($10.2 trillion) government debt market, the world’s largest, will collapse.

“We’re approaching a danger zone where bond prices could plunge,” Yoshimasa Hayashi, the Liberal Democratic Party’s shadow finance minister said in a Dec. 20 interview at his office in Tokyo. “It’s very important to be implementing a fiscal rehabilitation plan by 2012,” when baby boomers born after the war will start receiving state pensions, he said.

Surging bond yields would force the government to devote more funds to service debt, undermining Kan’s stimulus efforts. He has pledged to balance the budget by 2020 and pared back the campaign promises that helped his party end the LDP’s half century of almost unbroken rule. Japan’s total debt burden jumped 85 percent during the LDP’s last 10 years in power.

The opposition is working on what it calls the “X-Day” project, to fend off a potential bond market rout, said Hayashi, 49, a former Economy Minister.

“There are many worrisome spending initiatives” in Kan’s budget proposals, such as raising childcare allowances and handouts for farmers, Hayashi said. The government has yet to explain how it will finance a planned 5 percent cut in corporate taxes, which will cost at least 1.5 trillion yen.

Kan aims to freeze annual budget spending at 71 trillion yen for the next three years and cap bond sales at 44 trillion yen in the 12 months starting April 1, the same as this year’s record level.

Risks to Economy

Bank of Japan Governor Masaaki Shirakawa yesterday warned about risks to the economy from rising bond yield. Benchmark 10- year yields rose more than 40 basis points in the past two months to as high as 1.279 percent. The 10-year, 1.2 percent Japanese government bond was recently trading at 1.145.

Japan’s Finance Ministry forecasts long-term debt in the year ending March 31, 2011, will reach 868 trillion yen, about 180 percent of gross domestic product. Household assets rose 0.3 percent in the third quarter to 1,442 trillion yen from a year earlier, according to the Bank of Japan.

The narrowing gap is especially alarming for Japan, where more than 90 percent of public debt is held by domestic investors.

Hayashi said the gap between the two will shrink as an aging population forces the government to spend more on social security and families use up more savings.

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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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Australia

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I don’t follow it at all closely but in general they have been following a policy of budget surpluses and relying on increasing levels of private sector debt to sustain aggregate demand.

That’s not sustainable, even for China’s coal mine, and especially with China showing signs of slowing down.

Retailers cry poor as sales drop sharply during Christmas period

By Nick Gardner and Brittany Stack

December 19 — MAJOR store bosses claim Australia is experiencing a retail recession, with the quietest and slowest Christmas shopping period in 20 years.

Rising utility bills, mortgage rates and rents have decimated families’ disposable incomes, forcing many retailers to start Boxing Day sales one month in advance in a bid to entice shoppers, reported The Daily Telegraph.

Harvey Norman boss Gerry Harvey said there would be “blood on the streets” in the retail sector because business is so bad, the worst since the recession of the early 1990s.

“It’s a crisis, the worst in 20 years,” he said.

“There is a recession in retail right now. Boxing Day sales have had to come early because retailers need to sell something to pay their staff.”

The news comes as the Government announced an inquiry into the future of the retail sector to examine issues of competition, and the $1000 GST and duty-free threshold on overseas shopping.

Australian retailers and shopping centre owners have formed an alliance to try to persuade the government to abolish the $1000 GST-free threshold. They plan to spend millions on an advertising campaign to try to have imported goods subject to tax and import duty. Mr Harvey is not alone in his bleak outlook.

David Jones and Myer are offering discounts of up to 40 per cent across all departments in their Sydney stores, saying it was the toughest environment for years.

“Retail is challenging right now and to drive people into stores we are offering significant discounting,” Myer spokesman Mitch Catlin said.

“Every retailer is doing it. It is the best final week I can remember for consumers going into Christmas.”

David Jones described its sales as “patchy”.

Retailers traditionally make up to a third of their annual profits in December, but sales are down across the board as stores battle plummeting sales, shrinking profit margins and increased competition from overseas websites.

Russell Zimmerman, executive director of the Australian Retailers’ Association, said he’d never seen tougher conditions in 30 years.

“We’ve had 43 per cent of our retailers reporting sales figures for the period from December 5 to 11 at below last year’s levels. To have so many suffering falling sales is terrible.”

He said consumers have been affected not only by rate rises and higher utility bills but also spooked by events overseas. “They’re seeing economies such as Greece and Ireland in crisis and they’re getting worried,” Mr Zimmerman said.

He predicted retail sales of $39.9 billion, a 3.5 per cent rise on last year or about half the usual increase. He said this may force retailers to cut staff hours or cut back on casual workers. “We’re hoping for a good last week into Christmas,” he said.

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china inflation – ft article

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Sounds like the ‘managing expectations’ they teach at the western universities.

Inflation is under control, says Chinese regulator

By Jamil Anderlini

December 17 (FT) — “The recent inflation is completely different from the periods of very high inflation that China has encountered in the past,” Mr Liu, chairman of the China Banking Regulatory Commission, said on Friday.

“There is overcapacity for most industrial goods in the Chinese market and it’s impossible for upstream inflation to be transmitted downstream.”

The relatively sanguine assessment also partly explains why Beijing appears set to grant Chinese banks a lending quota next year that is roughly the same as this year’s, or even slightly higher, even though the economy is already awash with liquidity.

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ECB Has ‘Serious Concerns’ About Irish Bank Proposals

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EU Headlines
ECB Has ‘Serious Concerns’ About Irish Bank Proposals

And they call the shots now.

Trichet Says Euro Remains Credible; States Leaving Is ’Absurd’
EU Nations Violating Deficit Caps May Be Fined Up to 0.5% of GDP

Fines have proven unworkable.

My proposal for annual distributions from the ecb to the member govts on a per capita basis with terms and conditions is far more easily enforceable.

It’s a lot easier politically to withhold payment than to fine and collect.

European financials see dollar funding gap widen

Euro banks in dollars are a higher risk than US banks in dollars so a higher price of funding makes perfect sense to me.

Their deposit insurance is not yet credible, and the ECB has limited ability to lend in dollars.

And it also means none of them should be in the libor basket if their rates exceed US banks.
But they are, and the Fed doesn’t want libor to go up beyond its desired rate targets, so this Fed is likely to again lend unsecured to the ECB and other CB’s for the purpose of keeping libor rates down on an as needed basis.

EU rushes to raise bail-out cash

It will ultimately come from the ECB

German Tax Intake Rises as Recovery Firms, Handelsblatt Reports

Growth that reduces the deficit also slows the expansion

Germany’s robust economy not enough to stop record debt
France’s AAA Grade at Risk as Rating Cuts Spread: Euro Credit

The are all in ponzi (required to borrow to make payments), including Germany.
The ratings agencies seem to be slowly coming around to viewing them as US States,
as they should have done from inception.

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post boat ride recap and a reader’s questions answered

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After my brief recap is my response to a very good and typical inquiry I thought I’d pass along.

Meanwhile, the tax cuts were extended, and perhaps a bit of restriction removed, eliminating that source of risk of a sharp contraction that could have happened otherwise.

With the 2%, 1 year reduction in FICA taxes for individuals, arguably traceable to my efforts, there was some consideration of declaring victory and moving on, but I’m feeling more the opposite.

First, it’s tiny and at the macro level the propensity to spend of the recipients is trivial.

And it probably doesn’t even offset the drag from prices for imported crude and products.

And it may just be an interim step in letting the next Congress ‘pay for it’ with Social Security cuts.

The large increase in ‘spending cutters’ are about to take their seats in Washington, with many pledged to kick things off with a $250 billion spending cut, and then balance the Federal budget, along with what could be a majority ready to pass the doomsday bill for a balanced budget amendment to the US constitution.

And a President who seems to think that’s all a good idea as well.

And my nagging feeling that a 0 interest rate policy is highly deflationary, meaning that for a given size govt we need even lower taxes than otherwise, remains.

Lastly, for this post, China has been a first half/second half story, with much of their economic year front loaded into the first half, and they have apparently capped state sponsored lending, which could mean a relatively weak first half, or worse.

The euro zone is forecasting lower growth for next year as austerity bites and the ECB’s job becomes more problematic, as slower growth will slow the ‘fiscal improvement.’

And the recent extreme absurdity of the ECB raising more capital serves to highlight the risk of having incompetents in control.

Reader’s Questions:

I continue to review your book. A question or thought I come back to a lot lately is what is the long term implication of national debt.


– Should the federal deficit and associated payments be taken completely out of the budget discussion?

Yes, especially in conjunction with a permanent 0 interest rate policy and the tsy selling nothing longer than 3 mo bills.

That seems to be what is implied on page 32, when you state that “Nor is the financing of deficit spending of any consequence”. I take that whole section to mean that in any year the ability to consume output is not impacted by prior consumption and spending rather it is impacted by the current economic environment and ability to pay, and that payment on the national debt is not an issue (just moving money from one account to another).

Right. And potential consumption is always what goods and services we are physically capable of producing.

I understand that, but does value (rather than money) get added to the economic system when the transfers are made?

Yes, what’s called ‘nominal value’ is added- net financial assets such as tsy bonds, reserves at the fed, and cash are equal to the deficit spending.

Does it have any impact on inflation or taxation?

Not the deficit per se. Govt spending can drive up/support prices if the spending is on a ‘quantity basis’ vs a price constrained basis.

For example, if the govt offers a job to anyone willing and able to work that pays $8/hour and leave the wage at that level it won’t drive up wages.

But if it decides to hire, say, 5 million people and pay what it takes to get them to work it can drive up wages.

The first example is spending on a ‘price rule’ that says $8 max

The second is spending on a quantity rule that says we pay what it takes to get 5 million workers.

I guess the simple question is if we ran deficits every year forever would pricing or wages be impacted and if so how?

The spending and taxing will have the impact. The deficit is the difference between the two and equal to new savings of financial assets added to the economy. If the deficit spending matches ‘savings desires’ that means the spending and taxing are ‘in balance’ with regards to over all pricing pressures.

Is there a national security concern by having foreign governments having huge deposits in our currency? What if China, or whoever, just started selling their positions in dollars purposely to drive down the dollar’s value, accepting the risk that it would have on its own economy?

There is the risk that China might do that.

But also note that we are currently trying to force China to adjust its currency upward, which is a downward adjustment of the dollar. So at the current time driving the dollar down is actually a national policy objective, albeit one I don’t agree with.

Also, the level of one’s currency doesn’t alter the real wealth of the nation. With imports always real benefits and exports always real costs, the challenge is to optimize ‘real terms of trade’ which means get the most imports for any given level of exports. Here, again, we are going the wrong way as a nation, attempting to increase exports to proactively get our trade gap lower.

I guess what I am trying to reconcile is that if everything has a consequence, I don’t understand what consequence deficit spending has on the long term.

It allows available savings to be added to the economy.

For a given size of govt, there is a level of taxes which keeps the real economy in balance.

Over taxing is evidenced by unemployment/excess capacity, and under taxing is evidenced by excess spending that’s causing inflation.

My assumption, based on history is that there is no consequence. My hunch is that the deficit spending is what pushes the economy along

Yes, though I like to say it’s about removing the restriction of over taxation that allows the economy to move on it’s ‘natural’ course of some sort, of course massively influenced by the rest of our institutional structure.

and supports increases in pricing, which translates into inflation. Even at 2% per year after 100 years prices would be whatever 2% compounded annually over 100 years amounts to. And, in essence that is of no consequence.

Right, while ‘a’ dollar buys less than it used, all ‘the’ dollars are buying a lot more that’s being consumed. That is, real GDP is far higher than 100 years ago.

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