Monthly Archives: April 2011

More on the euro zone deficit report

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Yes, the deficit went from 6.3% to 6% of GDP, but the question remains as to whether they are at the point where further slowing from austerity measures continue to reduce the overall deficit or, instead, an induced slowdown begins to increase it.

Euro Zone 2010 Deficit Shrinks, Debt Rises

April 26 (Reuters) — The euro zone’s aggregated budget deficit fell last year as most countries slashed government spending to restore market confidence in public finances, but the debt still grew, Eurostat data showed.

The European Union’s statistics office said on Tuesday the budget deficit in the euro zone in 2010 was 6.0 percent of gross domestic product, down from 6.3 percent in 2009. Public debt, however, rose to 85.1 percent from 79.3 percent in 2009.

All euro zone countries except Germany, Ireland, Luxembourg and Austria improved their budget balance last year, but debt rose in all euro zone countries except Estonia.

Eurostat said Greece, which was forced to seek emergency funding from the euro zone last year because it was effectively cut off from market borrowing due to its large debt, cut its budget gap to 10.5 percent of GDP from 15.4 percent in 2009.

This is well above the initial target of the Greek austerity programme of 8 percent and even above the latest estimate from the European Union and the International Monetary Fund of 9.6 percent.

Greek public debt rocketed to 142.8 percent of GDP from 127.1 percent in 2009.

Ireland saw its budget deficit more than double to 32.4 percent of GDP last year from 14.3 percent in 2009 and its debt jumped to 96.2 percent from 65.6 percent as the country had to borrow to bail out its banking sector.

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Euro-Area Debt Reaches Record 85.1% of GDP as Crisis Festers

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It’s hard to say from the headlines whether proactive deficit reduction measures are slowing the economies to the point where the slowing is causing their deficits to increase.

However, if that is the case, continuing their deficit reduction efforts will only make things worse, to the point of forcing social upheaval.

And the rising deficits will begin to weaken the euro, as the deficit reduction that initially worked to strengthen the euro reverse.

And higher rates from the ECB will only serve to further increase national government deficits via higher interest payments by those same governments.

This also makes euro ‘easier to get’ and thereby weakens the currency.

Yes, the euro zone is seeing ‘inflation’, as they define it, moving higher, but under current conditions I don’t see any channel from rate hikes to lower ‘inflation’, again as they define it. But I do see how higher rates can instead add to the general price level through income interest and cost channels. All of which would be exacerbated should this policy also cause the euro to depreciate.

With regards to funding, there is nothing operationally to stop the ECB from, for all practical purposes, funding/backstopping the entire banking system as well as the national governments.

The question is the political will, which is not quantifiable.

And the solution remains painfully simple- the ECB can simply announce an annual payment of 10% of the euro zone’s gdp to the national governments on a per capita basis.

This will have no effect on inflation as it won’t get spent. It will only serve to allow all of the national governments to borrow at the ECB’s target rate, which would lower funding costs for the nations currently paying premiums for funding.

This will also give the ECB a lever to control deficits- the threat of suspending a nation’s funding if it is not in compliance.

And by removing the threat of market discipline from funding, the region would be free to set their stability and growth pact deficit targets at levels designed to achieve their macro economic goals for employment, output, and price stability.

Euro-Area Debt Reaches Record 85.1% of GDP as Crisis Festers

(Bloomberg) Euro-area debt reached a record in 2010. Debt rose in all 16 countries that were using the euro last year, lifting the bloc’s average to 85.1 percent of gross domestic product from 79.3 percent in 2009, the European Union’s statistics office said. Greece’s deficit topped expectations and debt ballooned to 142.8 percent of GDP, the highest in the euro’s 12-year history. Ireland’s debt surged the most, by 30.6 percentage points to 96.2 percent of GDP. Contingent liabilities from guaranteeing the banking system after the 2008 financial panic now amount to 6.5 percent of GDP, down from 8.6 percent in 2009, Eurostat said.

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Saudi Uneasy With High Oil Price, Worried About Economy

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Could be just talk or a prelude to a price cut.
No way to tell in advance- it’s a political decision on their part.

And it’s not illegal for them to place their personal and state bets first, and then cut price.
And it’s not illegal for them to cut any kind of a deal with anyone, anywhere in the world with regard to price.

In fact, it would be foolish not to.

Saudi uneasy with high oil price, worried about economy

By Cho Mee-young and Miyoung Kim

April 26 (Reuters) — Top oil exporter Saudi Arabia is uneasy with high oil prices and concerned about their impact on the global economy, the chief executive of state oil firm Aramco said on Tuesday.

Oil prices recovered from early losses on Tuesday, with Brent crude LCOc1 trading up 16 cents at $123.82 a barrel at 1059 GMT. Aramco Chief Executive Khalid al-Falih’s comments at an industry event in South Korea had weighed on sentiment earlier, when prices fell amid a wider decline in commodities.

“We are not comfortable with oil prices where they are today…I am concerned about the impact it could have on the global economy,” Falih told an industry gathering in South Korea.

There was no tightness in global oil markets, Falih said. His comments echoed those of Saudi Oil Minister Ali al-Naimi, who said last week that the kingdom had cut oil output in March as the market was oversupplied.

Unrest in North Africa and the Middle East and strong demand growth in Asia have pushed oil prices to their highest levels since 2008, triggering concern among consumers costly oil would harm economic growth and crimp fuel demand. OPEC producers also warned last week of the strain of high energy prices on economies still fragile as they emerge from the global financial crisis.

The kingdom has enough capacity to meet any spike in demand and plug short-term outages in supply, Falih said, adding that without Saudi spare capacity, oil price volatility would have been a lot worse when Libyan supply was lost.

OPEC’s largest producer boosted supply in February to above 9 million bpd to plug the gap left by fellow OPEC member Libya, where civil war cut exports. Saudi Arabia is the only oil producer with significant spare capacity to meet large supply outages such as that experienced in Libya.

Riyadh boosted capacity to 12.5 million barrels per day (bpd) in 2009, just as the global economic downturn cut demand. This left it with a supply cushion of over 4 million bpd, more than twice the spare capacity it targets of 1.5 million bpd to 2 million bpd. Output stood at 8.292 million bpd in March, down from 9.125 million bpd in February.

“People need to know that there are millions of barrels per day of spare capacity available,” Falih said.

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More indications Japan will ‘pay for’ the earthquake reconstruction

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Seems to be the way of the world right now.

On Mon, Apr 25, 2011 at 12:26 AM, sean wrote:

looks like japan will raise tax to destroy the demand that the quake couldn’t

JAPAN RULING PARTY’S NAKAGAWA: THINK BEST TO SEEK PUBLIC UNDERSTANDING FOR SALES TAX HIKE TO FUND RECONSTRUCTION

JAPAN RULING PARTY’S NAKAGAWA: RECONSTRUCTION BILL WILL CALL FOR GOVT TO MAINTAIN FISCAL DISCIPLINE

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Dollar index remains in decline

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With crude oil back up, the dollar has resumed it’s slide vs the other currencies. And odds are West Texas crude converges to Brent, which remains over $10 per barrel higher at about $124/barrel when/as the Cushing supply issues clear up.

However, with food and energy, at least for now, remaining a relative value story, this could largely be the other currencies deflating rather than the dollar inflating.

The US is a large importer of finished products and with relatively weak aggregate demand here this means downward price pressures on those who export to the US to sustain their export volumes and market share.

And with US unit labor costs not rising, US companies can price aggressively overseas and keep foreign margins under pressure as well.

So looks to me like the world shortage of aggregate demand/dangerously high unemployment will continue for a considerable period of time, now exacerbated by rising food and energy costs which takes purchasing power from high propensity to consume individuals and transfers it to low propensity to consume states, corporations, investment funds, etc.

While at the same time this (at least for the near future) relative value story gets treated like an inflation story by most of the world’s governments, who are consequently prone to take measures to further reduce aggregate demand.

No nation wins in this process, just some losing less than others.

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Robert Reich’s no so innocent fraud

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Obama’s Real Budget Plan (and Why It’s a Huge Gamble)

By Robert Reich

Here’s the part of interest to me:

Yet what are the chances of a booming recovery? The economy is now growing at an annualized rate of only 1.5 percent. That’s pitiful. It’s not nearly enough to bring down the rate of unemployment, or remove the danger of a double dip. Real wages continue to drop. Housing prices continue to drop. Food and gas prices are rising. Consumer confidence is still in the basement.

Fair enough, now on to the problem and the remedy:

By focusing the public’s attention on the budget deficit, the President is still playing on the Republican’s field. By advancing his own “twelve year plan” for reducing it – without talking about the economy’s underlying problem – he appears to validate their big lie that reducing the deficit is the key to future prosperity.

Promising rhetoric there- deficit reduction isn’t the answer!

The underlying problem isn’t the budget deficit.

Really getting my hopes up now!

It’s that so much income and wealth are going to the top that most Americans don’t have the purchasing power to sustain a strong recovery.

****sound of a balloon deflating****

Until steps are taken to alter this fundamental imbalance – for example, exempting the first $20K of income from payroll taxes while lifting the cap on income subject to payroll taxes, raising income and capital gains taxes on millionaires and using the revenues to expand the Earned Income Tax Credit up to incomes of $50,000, strengthening labor unions, and so on – a strong recovery may not be possible.

Message to Bob:

I suspect you understand taxes function to regulate aggregate demand, not to fund expenditures per se?

So please don’t blow smoke and instead just state that the tax cut part of your proposal is meant to add to aggregate demand,

And that the tax increase part is to achieve your vision of social equity without subtracting very much from aggregate demand.

Instead, by doing it the way you are doing it, you are implying that the deficit per se is of economic consequence.

This makes you part of the problem, rather than part of the answer, as you are supporting the deficit myths which are preventing any actual solution from being implemented.

Robert B. Reich has served in three national administrations, most recently as secretary of labor under President Bill Clinton. He also served on President Obama’s transition advisory board. His latest book is Supercapitalism.

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The Sin of US ethanol subsidies

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The reality if very simple, and there is no end in sight.

The US is a net exporter of food, and a net importer (directly and indirectly) of motor fuels.

So with current high gasoline prices we get a higher price for our food surplus by burning up part of it for fuel.

Even if the energy used in creating the ethanol is somewhat more than the energy produced, the energy used is generally coming from lower cost and domestically produced sources such as coal. And the fuel burned in our cars replaces gasoline- a much higher cost energy that we import.

So, bottom line, burning up part of our surplus crops as motor fuel, which drives up food prices world wide, we reduce imports of motor fuels and we get a higher price for the remaining foods we export.

That is, we benefit economically from the global chaos and the likelihood of mass starvation created by this policy.

:(

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