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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Archive for August 9th, 2011

FOMC Statement(3 dissents)

Posted by WARREN MOSLER on 9th August 2011


Karim writes:

Pretty tepid response in light of the changed assessment of current conditions and outlook. No hike thru early 2013 was already priced, so stating that they are unlikely to hike thru at-least mid 2013 doesn’t buy them that much more in terms of taking out tightening. Also, didn’t apply ‘extended period’ to balance sheet nor say anything about balance sheet composition other than they will review (which they said last time as well). Made indirect reference to QE3 in last paragraph-saying ‘range of tools’ was discussed and they may be employed as appropriate.

Right, careful not to offend China.

New
Information received since the Federal Open Market Committee met in June indicates that economic growth so far this year has been considerably slower than the Committee had expected.

Yes, the first half was revised down which they didn’t expect.
But they did not indicate it has been improving quarter to quarter though Q1 and Q2 GDP and their forecast shows that.

Indicators suggest a deterioration in overall labor market conditions in recent months, and the unemployment rate has moved up. Household spending has flattened out, investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Temporary factors, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan, appear to account for only some of the recent weakness in economic activity. Inflation picked up earlier in the year, mainly reflecting higher prices for some commodities and imported goods, as well as the supply chain disruptions. More recently, inflation has moderated as prices of energy and some commodities have declined from their earlier peaks. Longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee now expects a somewhat slower pace of recovery over coming quarters than it did at the time of the previous meeting

Yes, seems their forecasts are a bit lower, but still higher than the actual Q1 and Q2 results.

and anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, downside risks to the economic outlook have increased. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

That implies the possibility of core moderating some, which Goldman has also forecast.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee currently anticipates that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013. The Committee also will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

In line with their understanding with China and something closer to a strong dollar policy.

The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ these tools as appropriate.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen.

Voting against the action were: Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who would have preferred to continue to describe economic conditions as likely to warrant exceptionally low levels for the federal funds rate for an extended period.
2011 Monetary Policy Releases

Old
Release Date: June 22, 2011
Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate. Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee’s dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions–including low rates of resource utilization and a subdued outlook for inflation over the medium run–are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

Posted in CBs, China, Comodities, Fed, GDP, Inflation, Interest Rates, Karim | 11 Comments »

Equity storm over for a bit

Posted by WARREN MOSLER on 9th August 2011

From Goldman:

Published August 8, 2011

* Following Friday’s downward revisions, we now expect real GDP to increase just 2%-2½% (annualized) through the end of 2012 and the unemployment rate to rise slightly to 9¼% during this period.

This is still higher than the first half, so presumably corporations will have a better second half as well, and they did just fine in the first half.

And with lower gasoline prices, consumers get a nice break there which should firm their spending on other things as well.

The tighter fiscal won’t matter for this year, and markets won’t discount what may happen in November until it’s closer to actually happening.

So still looks to me like the recent sell off in stocks was mainly technical, as the initial knee jerk sell off from the debt ceiling and downgrade uncertainties triggered further selling by those with short options positions, much like the crash of 1987.

And, like then, and unlike early 2008, the current federal deficit seems more than large to me to keep things chugging along at muddle through levels of modest growth, continued too high unemployment, and decent corporate profits and investment.

Yes, risks remain. Europe is a continuous risk, but the ECB, once again, stepped in and wrote the check. China looks to be slipping but the lower commodity prices will help US consumers maybe about as much as they hurt the earnings of some corps.

So for now, with the options related stock selling over, it looks like we’re back to calmer waters for a while.

And Congress goes back to trying to cut the deficit to put people back to work.
Someone needs to tell them they haven’t run out of dollars, they aren’t dependent on China, and they can’t become the next Greece, and so yes, the deficit is too small given the current output gap.

But until then, we keep working to become the next Japan.

Posted in China, Comodities, Congress, Deficit, ECB, Equities, GDP, Government Spending, Japan | 15 Comments »

US Really Closer to ‘Junk Bond’ Status Than to Triple-A: Bove

Posted by WARREN MOSLER on 9th August 2011

So how would he rate American Airlines on it’s ability to award frequent flyer miles?

The legacies are falling like like flies.

The media will be hard pressed to find anyone with any credibility left with the emergence of MMT.

US Really Closer to ‘Junk Bond’ Status Than to Triple-A: Bove

The US credit rating would be even worse than its recent downgrade from Standard & Poor’s if the nation was judged as a private company, banking analyst Dick Bove told CNBC

Posted in Banking | 21 Comments »

QE Euro Style

Posted by WARREN MOSLER on 9th August 2011

It’s more of the same in the euro zone.

It all goes bad until, finally, when it gets bad enough,
the ECB writes the check and buys the bonds of whatever nation is in trouble.
Along with the usual imposition of austerity terms and conditions.

When the US and Japan do qe, they purchase their own liabilities
(the Treasury and Fed, BoJ and MoF, are central govt agencies under control of the national legislature)

When the ECB does QE, it buys the bonds of the euro member nations.
This would be analogous to the Fed buying the bonds of US states with funding problems.

In the US the Treasury took on the bulk of the counter cyclical deficit spending, with the states taking on a bit.

In the euro zone, the member nations took on all of the counter cyclical deficit spending, and buried themselves.
Like the US states, and unlike the Fed and the ECB, the euro member nations are credit sensitive entities.
And they are way over the practical limits of what markets will fund when push comes to shove.
So now the ECB is, reluctantly and as a last resort, taking the ‘burden’ of that deficit spending from the national govts to keep them afloat. (and imposing terms and conditions of austerity)

And the way things are going it will ultimately have to take on a lot.
Looks to me like that means multi trillions, just like the US federal govt does for it’s currency union.

Operationally this is no problem.
But politically the ECB has a politically imposed capital constraint that will most likely need to be addressed before too long.

And based on the way China blew it’s lid over US style QE and debt ceiling discussions, the question is how it might react to euro style QE, ECB capital discussions or discussion of haircuts of China’s holdings?

And the fact that neither qe nor QE are inflationary as they don’t add anything to aggregate demand,
may again mean nothing to China and much of the rest of the world who continue to believe it’s some kind of reckless and inflationary money printing.

Posted in ECB, EU | 17 Comments »

Volatility article in Markets Media

Posted by WARREN MOSLER on 9th August 2011

Thanks to Will Thompson. I got a nice mention here explaining how tail hedging can cause the kind of volatility we are now seeing, much like the crash of 1987:

Volatility: An Asset Class or Quick Buck?

Posted on August 8, 2011

The CBOE Volatility Index, commonly referred to as the market’s “fear index,” has had a one-day range of 27.54 to 39.25. As the past week showcases a near 30 percent change in the VIX, market participants wonder if the great volatility era has returned.

“Institutions have increased interest in volatility, not the VIX per se, but more so, hedging tail risk,” said Warren Mosler, co-founder of AVM L.P, a provider of brokerage, trading and administrative services to its affiliates, one of which is eponymous hedge fund III Associates, based in Boca Raton, Florida.
Mosler, currently a resident of the U.S. Virgin Islands, had run for the U.S. Senate in 2010, and is a published economist.

“There are programs out there to hedge tail risk when extremes happen because people want to be protected,” Mosler told Markets Media. “Out of the money options have gone way up, and they’re going to stay high for a long time. There has been a real shift of money into these strategies.”

Ironically, Mosler noted that increasingly used practices, such as tail hedging are propelling more volatility in the markets, causing a pro-cyclical self-fulfilling prophecy in the markets. Investors create fear to protect themselves from fear.

Despite an increased institutional interest in utilizing volatility, it remains to be a measure of protection, not a standalone asset class, for fund managers.
Volatility is traded more but it’s not an asset class by traditional definition, according to Mosler. “It’s a money-making activity, a way to hedge a position, a way to express one’s view.”

Posted in Trading | 6 Comments »

Asia Banks Face Dollar Funding Squeeze After US Cut

Posted by WARREN MOSLER on 9th August 2011

This has nothing to do with the downgrade.
Looks like the boys got themselves caught in a bit of a dollar short squeeze.
Falling crude oil and other commodity prices will only make it worse.
The Aussie dollar looks to be down close to 10% from recent highs, indicating a bit of a $US short there too.
Seems near 0 rates, QE, and general bad mouthing of the $US may have gotten them carried away on the short side, using it as a ‘funding currency’ and all that.

Could have been worse, could have been short yen for the same reason, which they also are…

Asia Banks Face Dollar Funding Squeeze After US CutAsia Banks Face Dollar Funding Squeeze After US Cut

August 8 (Reuters) — Asia’s banks are seen facing a bump-up in dollar-funding costs and potentially slower credit growth after Standard & Poor’s historic U.S. debt rating downgrade, strengthening China’s case to push the yuan as a global alternative to the dollar.

Ratings agency S&P cut the U.S. long-term rating by one notch to AA+ from AAA on Friday, sparking a sell off in global stock markets already roiling from concerns about the euro zone’s debt crisis.

Banks in Asia have about 15-20 percent of their loan book in U.S. dollars, according to an estimate by Ismael Pili, head of Asian bank research at Macquarie Capital. Analysts said their demand and costs have been climbing.

“We have seen rising demand for U.S dollar loans by corporates throughout the region,” said Christine Kuo, Singapore-based team leader for banking at Moody’s Investor Service.

“Banks have been raising U.S. dollar funding to meet their customer demand. If there is tightening or there is great volatility in the U.S. dollar market, that’s where we think the impact will come in. Some of the banks will need to pay higher for U.S. dollar funding or they may have to delay their capital market issuance should the market become too volatile,” she added.

Moody’s estimates Singapore’s DBS and OCBC have loan-to-deposit ratios in U.S. dollar of 140-160 percent. That means they do not have sufficient U.S. dollar deposits for loans but borrow from the wholesale market to finance corporate needs.

The funding squeeze will again intensify calls for replacing the dollar as the reserve currency.

Posted in Banking, Currencies | 5 Comments »