macro currency update

So it looks to me like all the major currencies have somewhat strong fundamentals.

That is, policy is working to make them ‘harder to get.’

EU and UK austerity policies are proactively cutting net govt spending from where it was.

And the EU has figured out that the ECB can fund at will entirely without ‘finance’ concerns, gradually removing the perceived chances of catastrophic defaults and the break up of the currency union with each succeeding intervention.

While higher crude prices are making the $US a bit easier to get offshore, interest rate policy, including QE2, is removing dollars from the non govt sectors that would have otherwise been paid out by the US govt, and domestic credit expansion remains anemic, particularly with regards to housing, the traditional source of ‘borrowing to spend.’ And the international stampede out of the dollar due to unwarranted fears of QE2 is still in the process of getting reversed. This flight took a variety of forms, from selling the dollar vs other currencies to buying gold, silver, and other commodities in general.

China is tightening up on state sponsored lending which makes yuan harder to get as they ramp up their politically motivated struggle to fight inflation.

And there are at least some noises that even India and Brazil seem to be at least leaning towards less inflationary policy, though sometimes misguided.

And while Japan has done a bit of fiscal expansion, and a bit of dollar buying, markets are telling us it hasn’t done enough, at least not yet, as the yen remains firm even after more than a decade of a near 0 rate policy.

All the currencies getting strong at the same time with only minor shifts in relative value is also evidenced by a general deflationary bias in the market place.

And, as previously discussed, this is coming after rising commodity prices have had a chance to bring on higher levels of supply.

Low interest rates have also added their positive supply side effects, as inventory is cheap to hold and capacity cheap to bring on line and keep in reserve.

Historically, private sector credit expansion has kicked in as economies recover, replacing the aggregate demand from government deficit spending, as the automatic fiscal stabilizers work to increase tax payments and reduce fiscal transfers for the likes of unemployment compensation.

This time, however, it seems to be different, with govts. taking proactive measures to contain and reduce deficits rather than continuing the govt. deficit spending until the hand off to private sector credit expansion takes over and the automatic fiscal stabilizers kick in.

In other words, for the size govt we have, we remain grossly over taxed as evidenced by the still massive output gap.

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6 Responses to macro currency update

  1. Curious says:

    “EU has figured out that the ECB can fund at will entirely without ‘finance’ concerns…”

    Yes. What they haven’t figured out is, how to prevent sovereign gov’ts from runaway spending.

    “…interest rate policy, including QE2, is removing dollars from the non govt sectors that would have otherwise been paid out by the US govt…China is tightening up…”

    China is doing (raising interest rates) the opposite of what the US gov’t is doing, no? So both cannot be causing their respective currencies to strengthen, can they?

    Reply

    Tom Hickey Reply:

    Curious, what is “runaway spending”?

    The US is importing goods and deflation and exporting jobs. China is exporting goods and importing jobs and inflation.

    The US needs to stimulate nominal aggregate demand to reach full employment, then net imports are a real benefit. China also need to increase consumer demand to grow the domestic economy. The major inflation that China is experiencing is due to a run-up in assets, especially housing, that is not matched by incomes. Both countries are experiencing a demand problem resulting from worker income being insufficient, leading to domestic and international imbalances.

    Reply

    Curious Reply:

    “what is “runaway spending”?”

    Nobody knows. That’s the uncertainty.

    “US needs to…”

    Maybe you’re right, I don’t know. I was just commenting on what Warren wrote, which to me appears to be contradictory statements.

    Reply

    WARREN MOSLER Reply:

    In conjunction with funding, the ECB imposes austerity measures.

    China is tightening up by trying to reduce lending by the state owned banks.

    Reply

  2. GLH says:

    “And the EU has figured out that the ECB can fund at will entirely without ‘finance’ concerns, gradually removing the perceived chances of catastrophic defaults and the break up of the currency union with each succeeding intervention.” Warren Mosler.

    “The only thing propping up the Eurozone at present is the large-scale ECB intervention in the secondary public bond markets. Take that away and the nations line up to default. ” Professor Bill Mitchel.

    Mr. Mosler: To me there seems to be a difference between what you and Professor Mitchel think concerning the Euro. Am I correct or can you
    explain?

    Reply

    WARREN MOSLER Reply:

    i don’t see a conflict?

    Reply

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