In case you thought any one of these nations understood its monetary systems:
*NODA SAYS COORDINATED INTERVENTION TOOK PLACE 9 A.M.
*G7 INTERVENTION TO START TODAY, NODA SAYS
*TREASURIES FALL; JAPAN SAYS G-7 TO COORDINATE ON INTERVENTION
*NODA: U.S., U.K., ECB, CANADA PARTICIPATING IN INTERVENTION
*EACH COUNTRY TO INTERVENE WHEN THEIR MARKET OPENS: NODA
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> Other nations only executing on behalf of Boj ie it all goes on Boj bal sheet
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In the context of this ‘everyone’s out of paradigm’ world, it makes sense for Japan’s MOF (Ministry of Finance) to buy dollars vs yen.
But it makes no sense to do this as a coordinated effort with other nations also buying dollars vs yen.
It does make sense for the MOF to ask the G7 for permission to buy dollars, as the ‘out of paradigm’ world considers that kind of thing ‘currency manipulation,’ and brands those nations that do buy fx as currency manipulators and outlaws. And they consider this kind of ‘competitive devaluation’ as a ‘beggar thy neighbor’ policy that robs others of aggregate demand. The last thing they all want to happen is a trade war, where each nation buys the other’s currency trying to weaken his own.
So it’s interesting that the rest of world has agreed to allow Japan to conduct this kind of ’emergency measure.’ It probably means it will be short term and limited.
However the strong yen itself may have only been an initial, temporary phenomena as Japan’s domestic households and businesses move to hoard yen liquidity in anticipation of looming yen expenses. That includes reduced borrowing for the likes of cars and homes as well as widely discussed converting of dollar and other fx deposits to yen deposits. This all works to make the yen ‘harder to get’ and keep it firmly bid.
What follows the initial flight to yen liquidity, however, is the spending of the yen, which makes yen ‘easier to get’. And with that comes more spending on imports, which means those yen spent on net imports are likely to get sold for dollars and other fx by the exporters selling to Japan, to meet their own ongoing liquidity needs.
Additionally, Japan”s budget deficit will rise, which makes yen easier to get by adding yen income and net financial assets to the economy, all of which contributes to a weaker yen. The deficit can rise either proactively, as may be happening with the (relatively modest, but a good start)10 trillion yen govt. rebuilding initiative just now announced, or reactively via increased transfer payments and falling tax revenues due to the fall off in economic activity.
And if they try to contain their deficit spending by implementing the consumption tax hike recently discussed, that will only make things worse, and further increase the reactive deficit spending.
Also, weaker exports and a smaller trade surplus due to supply issues likewise weaken the yen.
As for the BOJ, nothing they do with regards to ‘liquidity injections’ will matter, apart from keeping rates about where they are.
And not to forget that what’s happening in the Middle East, where that pot is still boiling as well.
In my humble opinion this remains a good time to be on the sidelines.
G-7 Statement on Currencies, ‘Concerted Intervention’
March 18 (Bloomberg) — The following is a joint statement
released today by officials from the Group of Seven industrial
nations. The G-7 includes the U.S., Japan, Germany, France, the
U.K., Italy and Canada.
“We, the G-7 Finance Ministers and Central Bank Governors,
discussed the recent dramatic events in Japan and were briefed
by our Japanese colleagues on the current situation and the
economic and financial response put in place by the authorities.
“We express our solidarity with the Japanese people in
these difficult times, our readiness to provide any needed
cooperation and our confidence in the resilience of the Japanese
economy and financial sector.
“In response to recent movements in the exchange rate of
the yen associated with the tragic events in Japan, and at the
request of the Japanese authorities, the authorities of the
United States, the United Kingdom, Canada, and the European
Central Bank will join with Japan, on March 18, 2011, in
concerted intervention in exchange markets. As we have long
stated, excess volatility and disorderly movements in exchange
rates have adverse implications for economic and financial
stability. We will monitor exchange markets closely and will
cooperate as appropriate.”
As previously discussed, the US should outlaw the use of libor by its banking system.
It makes no sense to allow US dollar rate setting for our banks to be set overseas by the BBA.
Setting our banking system’s dollar rates is the Fed’s responsibility.
And, to further make the point, note the word ‘expect’ in this part from below:
“LIBOR is calculated daily by asking contributing banks the rate at which they expect term funding to be offered between prime banks at 11:00 am London time.”
See more of my proposals here.
UBS Says Faces LIBOR Manipulation Probe
March 16 (Reuters) — Swiss bank UBS said it had received subpoenas from U.S. and Japanese regulators regarding whether it made “improper attempts” to manipulate LIBOR rates, the benchmark price for interbank borrowing costs.
“UBS understands that the investigations focus on whether there were improper attempts by UBS, either acting on its own or together with others, to manipulate LIBOR rates at certain times,” the bank said in its annual report on Tuesday.
The Financial Times in its Wednesday edition said regulators, including Britain’s Financial Services Authority, are probing all 16 banks that help the British Bankers’ Association (BBA) set LIBOR rates.
In particular, they are investigating how LIBOR was set for U.S. dollars during 2006-2008, just before and after the financial crisis, the newspaper said, citing sources familiar with the probes.
UBS said it had received subpoenas from the U.S. SEC, Commodity Futures Trading Commission and Department of Justice regarding its submissions to the BBA. It has also been ordered to provide information to the Japan Financial Supervisory Agency concerning similar matters.
UBS said it was conducting an internal review and is cooperating with the investigations. It declined to provide any further details.
The SEC declined to comment.
BBA said LIBOR has a straightforward and transparent calculation method which excludes any rates that are significant outliers.
“We observe rigorous standards in our scrutiny and governance of the LIBOR mechanism, and work with the industry to ensure their continued full confidence in one of its most accurate and reliable benchmarks,” it said in a statement.
LIBOR is calculated daily by asking contributing banks the rate at which they expect term funding to be offered between prime banks at 11:00 am London time. A set number of the highest and lowest contributions are discarded and the remaining rates averaged.
Looks to me like the lack of noises out of Japan means there won’t be a sufficient fiscal response to restore demand.
If anything, the talk is about how to pay for the rebuilding, with a consumption tax at the top of the list.
That means they aren’t going to inflate.
More likely they are going to further deflate.
Yes, the yen will go down by what looks like a lot, maybe even helped by the MOF, but I doubt it will be enough to inflate.
In fact, all the evidence indicates that Japan doesn’t don’t know how to inflate, nor does anyone else.
Worse, what they all think inflates, more likely actually deflates.
0 rate policies mean deficits can be that much higher without causing ‘inflation’ due to income channels and supply side effects.
There is no such thing as a debt trap springing to life.
Debt monetization is a meaningless expression with non convertible currency and floating fx.
QE mainly serves to further remove precious income from an already income starved economy.
Only excess deficit spending can directly support prices, output, and employment from the demand side, as it directly adds to incomes, spending, and net savings of financial assets.
The international fear mongering surrounding deficits and debt issues is entirely a chicken little story that’s keeping us in this depression (unemployment over 10% the way it was measured when the term was defined) that’s now taking a turn for the worse.
The euro zone is methodically weakening it’s ‘engines of growth’- its own (weaker) members being subjected to austerity measures that are reducing their deficit spending that paid for their imports from Germany. And now China, Japan, the US and others will be cutting imports as well.
UK fiscal austerity measures are accelerating on schedule.
The US is also working to tighten fiscal policy, particularly now that both sides agree that deficit reduction is in order, beaming as they make progress towards agreeing on the cuts.
The US had 6 depressions while on the gold standard, which followed the only 6 periods of budget surpluses.
And now, even with a floating fx policy and non convertible currency that allows for immediate and unlimited fiscal adjustments,
we have allowed the deflationary forces unleashed by the Clinton budget surpluses to result in this 7th depression.
We were muddling through with modest real growth and a far too high output gap and may have continued to do so all else equal.
But all else isn’t equal.
Collective, self inflicted proactive austerity has been working against growth, including China’s ‘fight against inflation.’
And now Japan’s massive disaster will be deflationary shock that, in the absence of a proactive fiscal adjustment, is highly likely to further reduce world demand.
Hopefully, the Saudis capitulate and follow the price of crude lower, easing the burden somewhat on the world’s struggling populations.
If so, watch for a strong dollar as well.
And watch for a lot more global civil unrest as no answers emerge to the mass unemployment that will likely get even worse. Not to mention food prices that may come down some, but will remain very high at the consumer level as we continue to burn up our food supply for motor fuel.
And it’s all only likely to get worse until the world figures out how its monetary system actually works.
Looks to me they are at least as afraid of becoming the next Greece as they are afraid of nuclear contamination.
I have seen no statements about ‘spending what it takes’ to secure the safety of the world’s population and to rebuild their nation.
The prime minister isn’t saying that, probably because of his concerns about finance.
He probably believes that Japan is dependent on lenders and may be at a tipping point with a 200% debt to gdp level.
He likely believes that with one false move the government’s ability to spend could be cut off.
In fact, they have been floating trial balloons about this being the right time for a new consumption tax to pay for any rebuilding.
In fact, and ironically, the actual risks of a major yen spending initiative that did substantially increase their deficit spending is not solvency but inflation. A massive rebuilding effort would have a good chance of raising the measured inflation rate a few points, and send the currency lower as well.
Both of which they have been desperately trying to accomplish, largely with ‘monetary policy’ that has yet to restore aggregate demand to full employment levels and promote real growth after nearly two decades of near 0 rates and massive QE initiatives.
And I still don’t see how any of this makes the yen stronger.
The repatriation story is nonsense, so if that’s what’s been driving prices watch for a sharp reversal.
This is not looking good.
The economy is perceived to be at least modestly growing and improving.
The President is now perceived to be working with the opposition, first to extend the tax cuts at year end, and now with the spending cuts.
The President has kept us out of direct conflict in the latest round of disruptions.
So what’s the problem?
Gasoline is pushing $4/gallon and there’s no plan except to tax it so we don’t use so much?
They all believe we’ve run out of money, are dependent on borrowing from the likes of China, and could be the next Greece?
The rebels are losing in Libya and there seems to be nothing we can do about it?
Homes are still being lost by the hundreds of thousands?
Vast numbers of people owe more on their house than it’s worth?
People can’t find decent jobs?
The healthcare situation is worse than ever?
There is a perception that the President and Congress are insensitive to what people are going through?
There is no actual recovery plan, nor even any proposals that make sense?
There is a general feeling that America is in decline?
Nothing much to say here about the financial aspects. Need to see how they react.
Best I can tell this doesn’t effect the world economy all that much.
Oil demand may initially fall some, due to a temporary reduction in consumption and maybe a refinery shut down. And domestic demand in general may fall until the rebuilding starts.
The power lost by the nuclear plants shutting down may amount to maybe 1-2% of total electric power consumption, and will be replaced but a combo of different sources.
Replacing the nuclear plants will cost something but not a lot in the scheme of things, and the new ones are even safer than the older ones, which seem to have help up reasonably well, especially considering the extreme stresses.
Govt deficit spending may go up by a small % of GDP as will the spending of insurance company and other private reserves.
And insurance companies then replenishing their reserves does the reverse.
I’d guess they govt will direct most of the rebuilding contracts to domestic companies.
I don’t see anything that makes the yen stronger?
Japan should have more than adequate resources of all types immediately available as emergency services, shouldn’t need any help from anyone, though for political purpose they will certainly accept it.
They’ve been saying for years there’s nothing left for govt to buy, so they must have thousands of emergency helicopters, millions of emergency temporary housing trailers, etc. etc. ready to go?
Euro area takes huge step towards comprehensive policy package
Euro area heads of state made far more progress than expected at last Friday’s summit. They reached an agreement on a number of elements of the comprehensive policy package which is due to be finalised on March 24/25.
Most important, in our view, was the decision that the cost of liquidity support can be reduced in order to help with debt sustainability. We have argued that the liquidity support that is being provided is too expensive to enable the peripheral sovereigns to achieve anything more than simply stabilise debt-to-GDP ratios at close to the peak levels. Even though the magnitude of the reduction in the borrowing cost envisaged at this stage (100 basis points) is not enough, it is a step in the right direction and it sends a signal that concessional lending could be used to enable the peripheral sovereigns to return to debt sustainability without disruptive debt restructurings.
But, it was also made clear that a lower borrowing cost of liquidity support is conditional on the behaviour of the recipient sovereign. In recognition of the commitments that Greece has made, the borrowing cost of the bilateral loans will be reduced by 100 basis points, and their maturity will be extended from 4 years to 7.5 years. In contrast, due to the reluctance of the new Irish government to discuss raising its 12.5% corporate tax rate, the borrowing cost of the EFSF and EFSM loans to Ireland have been left unchanged.
The comprehensive policy package which will be completed by March 24/25 is due to have five elements: an increase in the size and a broadening of the scope of the EFSF (which will provide liquidity support out to mid 2013); more details on the operation of the ESM (which will provide liquidity support beyond mid 2013); a reformed Stability and Growth Pact (which will guide fiscal policy across the region); a new macroeconomic surveillance framework (which will guide macro prudential and structural policies to limit intra regional imbalances); and a competitiveness pact (which will guide all policies towards lifting growth potential in the region).
Regarding the EFSF, Euro area leaders agreed that its lending capacity will be increased to 440 billion euros, although they did not specify how this would be achieved. In terms of additional functionality, only one thing was agreed: allowing the EFSF to intervene in the primary debt markets. This looks to be an alternative to providing liquidity loans, rather than taking over the role of secondary market support that the ECB has been doing. It looks like the ECB has failed in its attempt to have the EFSF take over this task.
Regarding the ESM, it was confirmed that it will have an effective lending capacity of 500 billion euros and that this will be ensured by a mix between paid in capital, callable capital, and guarantees. It will also have the power to purchase debt in the primary markets, but not the secondary markets.
On the reforms to the Stability and Growth Pact and the new macroeconomic surveillance framework, these will be finalised by the finance ministers before March 24/25.
On the competitiveness pact, Euro area leaders agreed on its broad contours (it is now called the pact for the euro). It is essentially about boosting growth potential in the region, motivated by the idea that ‘competitiveness is essential to help the EU grow faster and more sustainably in the medium and long term, to produce higher levels of income for citizens, and to preserve our social models’. It covers four areas: improving competitiveness (through inter alia a better alignment of wages and productivity, and through higher productivity); boosting employment (through increased flexibility and tax reforms); improving the medium term sustainability of public finances (through inter alia aligning retirement ages with demographics); and reinforcing financial stability (through legislation on banking resolution and regular bank stress tests).
Euro area leaders made some other announcements as well, including an agreement that the introduction of a financial transactions tax should be explored and there is a desire to develop a common corporate tax base.
Even though the final announcement on the comprehensive policy package is still almost two weeks away, the content seems pretty clear. No one should doubt that Euro area leaders are committed to ensuring the survival of the monetary union. On the question of whether sovereign debt restructuring is going to occur, the comprehensive policy package was never going to be able to fully resolve that issue. Whether or not any of the peripheral sovereigns end up restructuring their debt depends on both the extent of the fiscal effort they are willing to engage in and the extent to which the rest of the region is willing to subsidise the liquidity support. Both of these are still unclear, but the rest of the region has now sent a powerful signal that if the debtor sovereigns put in a good faith effort then debt restructurings could well be avoided.
David Mackie
Background information first, answer later-
The Fed sets the fed funds target at their regular meetings, and lets the market then determine the term structure of rates.
That term structure of rates is therefore largely a function of anticipated future fed funds rate settings.
Then the Fed does QE- buys longer term securities at market prices- to try to bring longer term rates down, particularly mortgage rates.
But longer term rates don’t come down as much as hoped for.
Now to the point all this:
What the market place believes QE does, and not what QE actually does, is the same ‘force’ that largely determines the term structure of rates.
And so when the Fed does QE,
and the market place believes that QE will work to promote a strong economy and risk inflation,
the term structure of rates goes up in anticipation of higher fed funds rate settings by the Fed down the road.
And when the Fed ends QE,
that same market place then believes that support has been pulled from the economy,
the future is no longer as inflationary,
and the term structure of rates falls as fears of future fed funds hikes subside.
It doesn’t matter that the mainstream beliefs are wrong with regard to QE,
because the term structure of rates only reflects those same mainstream market place expectations, regardless of their actual validity.
And yes, this all highly problematic for a Fed trying to keep long rates down.
So this was a good monthly employment report?
Ok, there were a few new jobs, but not nearly as many as there used to be each month a few years ago, in an economy a lot closer to full employment, with a much smaller output gap, and one that was considered only modest at the time.
And average weekly hours remain a lot lower than before, indicating businesses have room to increase productivity/add output without adding staff.
The fall in the unemployment rate has been substantially helped by the decline in the labor participation rate, below, meaning more people are out of work aren’t included as unemployed as they are no longer looking for work.
