Monthly Archives: January 2011

Gross misrepresentations

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My comments following Bill Gross’s comments:

I don’t know if the U.S. has reached a desperate point, but it is employing instruments and vehicles and policies that smack of desperation.

He fails to see the function of federal taxes is to regulate aggregate demand, and not to raise revenue per se.

We are not looking at a default here, but at years of accelerating inflation, which basically robs investors and labor of their real wages and earnings.

Apart from the possibility that he’s wrong, and that there will be no accelerating deflation, inflation per se does not make a nation poorer, and does not necessarily reduce real wages and earnings. In fact, real wages could very well be made to increase during an inflationary period. It’s all about policy responses and institutional structure. And as for investors, some will do well and some will do poorly, which most don’t consider an injustice.

We are looking at a currency that almost certainly will depreciate relative to other, stronger currencies in developing countries that have lower levels of debt and higher growth potential.

Maybe and maybe not on both scores.

The dollar may not depreciate.

And lower levels of public debt and higher growth potential do not necessarily mean a currency will appreciate.

For example, Japan has had perhaps the least growth potential and one of the strongest currencies for quite a while, and China has had a policy of keeping its currency weak which has been credited with fostering high growth, etc.

And, on the short end of the yield curve, we are looking at creditors receiving negative real interest rates for a long, long time. That, in effect, is a default.

No, it’s a policy option.

A default is a promise broken.

And there is no national promise by any nation to provide a real return to savers at the short end of the curve.

Ultimately creditors and investors are at the behest of a central bank and policymakers that will rob them of their money.

That’s a serious and groundless accusation of motivation of the Fed.
Robbing implies dishonesty and involuntary confiscation.

However no one is forced by the Fed or anyone else to hold dollars in money market accounts, investors buy securities with known nominal interest rates, and for all practical purposes investors know much the same information regarding inflation as the Fed does.

So when William Gross uses the word ‘rob’ he’s implying the Fed is deliberately publishing false inflation forecasts to trick investors into buying US govt securities at rates lower than if they knew the Fed’s actual inflation forecasts.

I suggest an immediate apology is in order for this groundless, inappropriate, and insulting remark.

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China agrees to purchase billions in US goods

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So President Obama declares victory because we get to build planes and send them to China.

And why?

To get our dollars back, of all things, as if there’s any public purpose to that.

And so because we continue to believe we could be the next Greece, we continue to turn ourselves into the next Japan.

Which includes being an exporter, just like Japan.

China agrees to purchase billions in US goods

January 19 (CNBC) — The Obama administration, trying to build ties with an economic rival, said Wednesday that China would buy $25 billion in U.S. goods and had given final approval to a long-negotiated $19 billion deal for 200 Boeing planes.

The announcement came as Chinese President Hu Jintao arrived at the White House for a state visit with President Barack Obama.

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Is Core Europe Headed for a Hard Landing?

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Is Core Europe Headed for a Hard Landing?

By Michael Darda

Executive Summary: We are increasingly concerned that the eurozone — including the core — is headed for a sharp slowdown. This powerpoint presentation shows that:

• Leading indicators in the eurozone have rolled over. The OECD’s Euro-Area Composite Leading Index has declined for seven consecutive months;

• Euro-area monetary aggregates are weak across the board. Both M1 (narrow money) and M2 (broad money) are contracting on a three-month annualized basis in the eurozone;

• However, euro-area business confidence is nearly back to peak 2007 levels. Despite the ongoing struggles, business confidence is high in the eurozone. However, confidence levels tend to be elevated at cycle peaks and depressed at cycle troughs;

• Weak money growth and strained credit markets suggest a high risk that the euro-area nominal GDP recovery could be stopped in its tracks. Absent a powerful positive shock to the velocity of money, European nominal GDP growth is likely to slow sharply;

• Debt spreads in Spain and Italy are showing a troubling pattern of “higher highs and lower lows”. Despite backing off a bit recently, sovereign debt spreads in Spain and Italy are near record highs. Worryingly, each successive “peak” in spreads has been higher than the previous one while each “trough” has also been higher.

No question austerity will work- that is, it will force negative growth.
Question is just when.
Unless they make fiscal adjustments, but that seems unlikely.

I’m starting to feel a deflationary malaise coming on as the end of year/beginning of new year related activity subsides.

Headline CPI increases to me are mainly just relative value shifts that rob demand for other things,
and are not anywhere near pushing through to core measures which would pass them on to indexed compensation.

But the talk of inflation is just one more thing keeping global authorities thinking they don’t need another ‘fiscal stimulus’ as they continue to push spending cuts and ‘fiscal responsibility’.

Housing going nowhere. Jobs going nowhere as GDP growth only marginally exceeds productivity growth.

Financial sector finding it hard to make a buck as loan demand remains weak and competition is driving down net interest margins and spreads in general. (I’m thinking of holding a walkathon to help them out. Anyone want to kick in a few cents a mile?)

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US pressing China to buy tens of billions of dollars in US aircraft, auto parts, agricultural goods and beef “to build goodwill”

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I call it a completely misguided sense of public purpose as a direct consequence of not understanding monetary operations:

U.S. Presses China for Deals

By Bob Davis

January 15 (WSJ) — The U.S. is pressing China to buy tens of billions of dollars in U.S. aircraft, auto parts, agricultural goods and beef to build goodwill when the two countries’ leaders meet Wednesday.

In the run-up to the closely watched event between Chinese President Hu Jintao and President Barack Obama, the two countries are jockeying to set the agenda for the visit, as they haggle over deals. The White House expects the centerpiece of the package to be the sale of Boeing Co. jets.

Leaders of both nations say they want to show that the U.S.-China relationship, which was on the skids last year, is back on track and is mutually beneficial. But they also want to frame the meeting in a way that plays most favorably at home.

“Our relationship is marked by great promise and real achievement,” said Secretary of State Hillary Clinton in a speech on Friday. “And more than ever it will be judged on the outcomes it produces.”

Mr. Hu’s last state visit, in 2006, came before the global financial crisis when the U.S. was clearly a dominant economic power. Since then, China has become the world’s second-largest economy and its state-orchestrated style of development has become a rival to the U.S.’s more market-oriented approach.

Chinese deal-making is part of nearly all of their state visits abroad—it announced $16 billion in deals in India last month. And given a trade gap with China on track to pass $250 billion last year, the U.S. visit will likely be dismissed by China critics as insufficient.

But the White House considers the deals a way to show concrete benefits from the encounter, when many other issues being discussed—including Iran, North Korea and intellectual-property issues—aren’t easily resolved. The Obama administration also wants to show its ability to add jobs during a time of 9.4% U.S. unemployment.

Given tensions in past months between the two powers, China wants the meeting to go off smoothly and to underscore its new world stature. Since Mr. Hu’s last visit to the White House, “China has grown into this strong young man from a teenage boy,” said Zhuang Jianzhong, deputy director of the Center for National Strategic studies at Shanghai’s Jiao Tong University.

The U.S. goal is tangible progress on issues including trade, currency policy, North Korea and Iran.

In her speech, Mrs. Clinton singled out the need for China’s military “to overcome its reluctance at times to join us in building a stable and transparent military-to-military relationship.” She was referring to the Chinese military’s recent rebuff of Secretary of Defense Robert Gates’s bid to re-establish close, regular meetings at top levels.

Mrs. Clinton also said it was vital China join the U.S. “in sending North Korea an unequivocal signal that its recent provocations—including the announced uranium enrichment program—are unacceptable.” The U.S. recently credited Beijing for convincing North Korea to calm tensions after it shelled a South Korean island.

This past week, Undersecretary of State Robert Hormats, Commerce Undersecretary Francisco Sanchez and Deputy U.S. Trade Representative Demetrios Marantis spent three days in Beijing ironing out trade and investment issues. They focused on two Chinese buying trips, headed by senior officials of the Chinese Ministry of Commerce and the China Council for the Promotion of International Trade, that are set to begin Saturday and run through Jan. 21.

The two groups plan to visit half a dozen cities, including Boeing’s home base of Chicago, where Mr. Hu will meet with U.S. and Chinese business executives Friday.

The aircraft purchases are a priority because Boeing is a symbol of U.S. export strength, and it has facilities and subcontractors around the U.S. China also has great purchasing flexibility when it comes to aircraft because carriers’ deals aren’t final until they are approved by the government.A Boeing spokesman declined to comment.

China is also looking to highlight its role as an investor in the U.S. auto industry. SAIC Motor Corp., China’s largest auto maker, recently bought a $500 million stake in General Motors Co., just under 1% of the company. Chinese investors have bought stakes in auto suppliers.

The focus on purchases, said a senior U.S. official is “in part to reduce the trade imbalance, in part to demonstrate to the American public that there are real job benefits to the relationship with China and, in part, to improve the overall tone and to make the trip successful.”

On other commercial issues, the U.S. is pressing China to provide a specific plan for how government agencies and state-owned businesses will buy legitimate software, not knock-off versions. Beijing has already committed to such purchases.

The White House is also seeking commitments that U.S. firms in China won’t be shut out of government-backed projects for high-tech products. The U.S. official said it was unclear at this point how much progress would be made in those areas.

China is looking to use the state visit to compel changes in U.S. policy. Beijing blames the Federal Reserve’s low interest rates and bond purchases for worsening China’s inflation. A delegation of Chinese academics have been visiting Washington, urging the Fed take into account the problems of developing nations when setting policy.

There is little chance the U.S. will agree, said Eswar Prasad, a China scholar at the Brookings Institution, who met with the academics, because of the Fed’s mandate to consider domestic economic concerns when setting policy. The Fed also believes boosting the economy helps the global economy because so many nations rely on the U.S. market.

Foreign-exchange policy is also bound to be a big issue at the Obama-Hu meeting. Since China announced in mid-June that it would lets its currency float somewhat, it has appreciated about 3.6%—with the yuan strengthening in recent days to new heights.

When accounting for the effects of higher inflation in China compared with the U.S., Treasury Secretary Timothy Geithner said the yuan is moving up at a pace of about 10% a year. That is getting closer to the level the U.S. would like to see.

Either China lets the currency rise to fight higher prices, Mr. Geithner argues, or higher prices will make Chinese exports more expensive anyway. In either case, “competitiveness is going is shifting now in our favor,” he said.

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Greece to Restructure Debts of Govt Pension Funds

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Looks like the govt is reducing the amount of euro they owe themselves,

But not reducing the liabilities those govt pension funds and other agencies owe others?

Greece to Restructure Debts of Pension Funds, Isotimia Reports

By Marcus Bensasson

January 17 (Bloomberg) — Greece’s Finance Ministry is planning to restructure debts of 30 billion euros ($39.9 billion) held by social security funds and state-run enterprises, Isotima said in a report, without saying where it got the information.

The government will replace existing debts with medium and long-term bonds with lower rates of interest than market rates, the Athens-based weekly newspaper reported yesterday.

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Irish Central Bank printing money?

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>   
>   (email exchange)
>   
>   On Sun, Jan 16, 2011 at 12:34 PM, qrote:
>   
>   Had you heard about this?
>   

Central Bank steps up its cash support to Irish banks financed by institution printing own money

Yes and no:

“A spokesman for the ECB said the Irish Central Bank is itself creating the money it is lending to banks, not borrowing cash from the ECB to fund the payments. The ECB spokesman said the Irish Central Bank can create its own funds if it deems it appropriate, as long as the ECB is notified.”

My understanding is that rather than keep all the member bank accounts themselves, the ECB utilizes the existing member nation Central Banks as their designated agents for transactions purposes.

So the member banks in the euro zone have their clearing accounts with their national banks.

That means funding for the member banks comes via credits to their accounts at their local central bank, and it’s the personnel at those local central banks, like the Irish Central Bank, who enter the actual debits and credits for the member bank accounts.

In the case the ‘money that’s being created’ is describing secured lending to the member banks as per ECB policy and directive, with the Irish Central Bank making the actual debits and credits to the Irish commercial bank accounts on their books.

It’s somewhat like the US where the NY Fed, for example, keeps the books for it’s member banks.

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Proposal for Japan and China- buy US state muni bonds!

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My proposal for Japan and China is to announce a plan for each nation to purchase up to $150 billion of US state municipal bonds to help out the US states during these difficult times.

They would be welcomed as rescuers, much like they have been with their announcements to buy securities from troubled euro zone member nations.

While at the same time, buying $US financial assets in the form of state muni debt would work to weaken their currencies vs the dollar and support their export industries.

Doesn’t get any better than that!

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Euro-Area Inflation Accelerates to Fastest Since 2008

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Saudi crude oil price hikes are nudging up the various inflation indices some, but most core measures remain tame and the headline CPI increases will only be a one time event if/when crude prices stabilize, as aggregate demand remains relatively weak and inventories plentiful in general.

However, the anti inflation rhetoric from the CB’s, which still fail to recognize the currency is a (simple) public monopoly, will intensify as they all believe it’s inflation expectations that cause actual inflation, and so they are continuously in action to manage those pesky expectation things. Call it another example of ‘Aztec Economics’ (the Aztecs performed human sacrifices to make sure the sun came up every morning).

EU Headlines:
Euro-Area Inflation Accelerates to Fastest Since 2008

Europe Keeps Interest Rates Steady on Concern About Economic Growth

Trichet Puts Inflation Fighting Back on ECB Agenda

ECB’s Weber Says Inflation Risks ‘Could Well Move to Upside’

EU Bailout Rates May Need to Drop for Aid to Work: Euro Credit

Euro Will Be Even Stronger Currency, EU’s Almunia Tells Negocios

Euro-Area November Exports Increase 0.2%, Imports Rise 4.4%

Weber Says German Economic Growth Will Moderate Going Forward

German Inflation Expectations at Nine-Month High as CPI Surges

Spain Underlying Inflation Rate Rises to Highest Since Feb. 2009

Euro-Area Inflation Accelerates to Fastest Since 2008

By Simone Meier

January 14 (Bloomberg) — European inflation accelerated to the fastest pace in more than two years in December, led by surging energy costs, complicating the European Central Bank’s efforts to deal with the sovereign debt crisis.

Inflation quickened to 2.2 percent in December from 1.9 percent in the previous month, the European Union’s statistics office in Luxembourg said today. That’s the fastest since October 2008 and in line with a Jan. 4 estimate. European exports rose 0.2 percent in November from the previous month when adjusted for seasonal swings, a separate report showed.

Crude-oil prices have jumped 10 percent over the past three months, fueling inflation just as austerity measures threaten to hurt economic growth. ECB President Jean-Claude Trichet said yesterday that inflation in the euro region may remain above the bank’s 2 percent ceiling over the coming months, signaling he is prepared to raise interest rates if needed.

“Overall, the latest from the ECB reveals some increase in concern about euro-zone inflation dynamics,” said Simon Barry, chief economist at Ulster Bank in Dublin. “It doesn’t appear that that trigger is going to get pulled in the next few months, but the chances of a hike by the end of this year have risen.”

The euro declined against the dollar after the data, trading at $1.3354 at 10:02 a.m. in London, down 0.1 percent on the day after being up as much as 0.7 percent earlier.

Energy Prices

The increase in energy prices leaves households with less money to spend just as governments from Spain to Ireland toughen budget cuts. The ECB last month forecast euro-area inflation to average around 1.8 percent this year and about 1.5 percent in 2012.

Trichet, whose central bank has been forced to provide banks with emergency liquidity and purchase governments bonds to fight the crisis, said yesterday that he sees signs of “upward pressure” on inflation over the coming months. Inflation is “likely to stay slightly above 2 percent, largely owing to commodity-price developments, before moderating again towards the end of” 2011, he said at the press conference in Frankfurt.

Euro-area core inflation, which excludes volatile costs such as energy prices, held at 1.1 percent in December, today’s report showed. Energy costs rose 11 percent from a year earlier after increasing 7.9 percent in November.

The euro’s depreciation has helped drive up import costs while also making goods more competitive abroad just as the global recovery gathered strength. In Germany, Europe’s largest economy, plant and machinery orders surged 43 percent in November from a year earlier and business confidence jumped to a record last month.

German ‘Engine’

Siemens AG, Europe’s largest engineering company, said on Jan. 11 that it’s confident of reaching its full-year targets. The Munich-based company is “off to a good start,” Chief Financial Officer Joe Kaeser said on the previous day.

Euro-area imports increased 4.4 percent in November from the previous month and the region had a trade deficit of 1.9 billion euros ($2.6 billion) after a surplus of 3.5 billion euros, today’s report showed.

“Germany will remain the region’s growth engine,” said Andreas Scheuerle, an economist at Dekabank in Frankfurt. “Companies in countries with buoyant demand will find it easier to pass on higher costs while some nations remain very weak.”

Euro-area exports to the U.S. rose 18 percent in the 10 months through October from a year earlier, while shipments to the U.K., the euro area’s largest market, increased 11 percent. Exports to China surged 38 percent. Detailed data are published with a one-month lag.

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Tea Party ‘fiscal responsibility’ rhetoric risking depression

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The Tea Party leadership needs to read ‘The 7 Deadly Innocent Frauds of Economic Policy’ and go public on the need for a higher debt ceiling and a larger federal deficit, before they do even more damage to the US economy:

Public strongly opposes debt level increase: Reuters/Ipsos poll

By Andy Sullivan and Richard Cowan

December 25 (Reuters) — The U.S. public overwhelmingly opposes raising the country’s debt limit even though failure to do so could hurt America’s international standing and push up borrowing costs, according to a Reuters/Ipsos poll released on Wednesday.

Some 71 percent of those surveyed oppose increasing the borrowing authority, the focus of a brewing political battle over federal spending. Only 18 percent support an increase.

The poll underscores the tough task ahead for U.S. lawmakers as the debt nears its current ceiling of $14.3 trillion. Treasury Secretary Timothy Geithner last week warned that a failure to raise the borrowing limit in the coming months could lead to “catastrophic economic consequences.”

Brian Riedl, the lead budget analyst at the conservative Heritage Foundation, said the poll findings put “a lot more pressure on those who want to raise the debt limit to make a convincing argument to a very skeptical public.”

Republicans, who won control of the House of Representatives in November on a promise to scale back government, hope to pair any debt-ceiling hike with a commitment from President Barack Obama to reduce long-term spending.

Republicans have vowed to slash $60 billion from the budget as soon as March, but many of those cuts are not likely to be popular with the public.

The United States posted an $80 billion budget deficit in December. The government has now posted a budget deficit for 27 straight months, the longest streak on record.

A deal to extend tax cuts this year that was approved by Congress in December is expected to put a hole of more than $800 billion in the deficit over the next decade.

Obama wants broader tax reforms although it will be hard to get them through a divided Congress in the next two years. His administration is exploring ways to boost tax incentives for corporate investments, Geithner said.

WHAT TO CUT?

While the public apparently does not want Washington to keep borrowing more and more, it appears to lack a clear idea of how to cut spending.

“You get nervous,” Riedl said. “There is some contradiction: Historically the public wants a balanced budget but doesn’t show a lot of enthusiasm toward the policies to get us there.”

Only 24 percent say the country can afford to cut back on education spending, a likely Republican target, and 21 percent support cuts to law enforcement.

With the United States fighting wars in Afghanistan and Iraq, 51 percent supported cutbacks to military spending.
Less than half, 45 percent, support an expected Republican effort to pare enforcement of environmental laws.

Some 53 percent support cutting the budgets of financial regulators like the Securities and Exchange Commission, in spite of the widespread consensus that a lax regulatory atmosphere contributed to the financial crisis of 2007-2009.

And 47 percent support cutbacks to national parks, which were shuttered for several weeks during the budget battles of 1995 and 1996.

Expensive benefit programs that account for nearly half of all federal spending enjoy widespread support, the poll found. Only 20 percent supported paring Social Security retirement benefits while a mere 23 supported cutbacks to the Medicare health-insurance program.

Some Democrats say that tax increases, especially on the wealthy, have to be part of any serious effort to control deficits, coupled with better enforcement of tax laws or streamlining those laws.

Some 73 percent support scaling back foreign aid and 65 percent support cutting back on tax collection — two very small lines in the massive federal budget ledger.

The poll of 1,021 U.S. adults was conducted between Friday and Monday. It has a margin of error of plus or minus 3.1 percentage points.

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China to Let Companies Invest Overseas Using Yuan, and Geithner gets it all backwards?

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China Headlines:
China GDP to Grow 8.7% in 2011, Down From 10%, World Bank Says

That’s a material drop that could take away some of the bid for commodities.

PBOC’s Yi Says China Will Remain Long-Term Investor in Europe

Yes, along with Japan now

And an obvious Trojan horse, as they are doing this to support their export industries

Geithner Says China Must Boost ‘Undervalued’ Yuan

The yuan has climbed about 3 percent against the dollar since officials
in June scrapped a peg which had been in place since the global
financial crisis.

“This is a pace of about 6 percent a year in nominal
terms, but significantly faster in real terms because inflation
in China is much higher than in the United States,” Geithner
said. Taking inflation into account, the yuan is rising at a
rate of about 10 percent a year, “so if that appreciation was
sustained over time, it would make a very substantial
difference,” he said in response to a question after the
speech.

Reads to me like he has that backwards?
Doesn’t higher inflation bring the currency ‘in line’ without nominal revaluation?

China Says Stronger Yuan Won’t Solve U.S. Trade Gap
China to Let Companies Invest Overseas Using Yuan

Interesting!

China’s companies now need to sell yuan to the Bank of China to get fx to invest over seas.
This depletes China’s fx reserves which may or may not be an issue for them.

If instead China lets its companies spend yuan overseas directly that will put downward pressure on the yuan via the rest of world satisfying its yuan ‘saving desires’ directly.

Currently, the rest of world satisfies its yuan ‘saving desires’ by selling dollars, euro, etc. to the Bank of China via the Bank of China’s currency intervention operations that keep the yuan weaker than otherwise.

So this could be a back door way for China to keep the yuan weaker than otherwise without as much currency intervention?

And note that they again use ‘Fed money printing’ as cover.

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