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Archive for November, 2011

CB announcements

Posted by WARREN MOSLER on 30th November 2011

Just looks like the Fed lowered the rate on its swap lines to keep libor down, which had been moving up to its prior swap line rate.

No big deal, apart from the fact the Fed shouldn’t be allowed to lend on an unsecured basis like this without explicit approval of congress.

Lending unsecured on an unlimited basis has the potential to be highly inflationary.

With the currency a public monopoly, the price level is necessarily a function of prices paid at the point of govt spending and or collateral demanded when govt lends.

Allowing unlimited unsecured lending has the potential to vaporize the currency. And while in this case that kind of abuse isn’t likely, the potential is there.

Posted in CBs, ECB, Fed | 97 Comments »

Indian Firms Risk Dollar Debt Default as Rupee Slides

Posted by WARREN MOSLER on 30th November 2011

Another region with a private sector dollar short to worry about.

Seems the world is short dollars and euro?

Indian Firms Risk Dollar Debt Default as Rupee Slides

By James Fontanella-Khan

November 29 (FT) — Dozens of Indian companies are coming under financial stress after the sharp fall of the rupee against the dollar during the past few months made once-cheap loans in the US currency much more expensive, analysts have warned.

Indian companies face an overall short-term foreign debt maturity of $16bn for the year ending in March 2012 – according to Crisil, the Indian subsidiary of the US credit rating agency Standard & Poor’s – the majority of which is US dollar-denominated.

The most common forms of the debt are foreign currency convertible bonds, which can either be converted into a lucrative stake in the issuer on maturity, which is attractive if the issuer’s shares rise, or simply repaid in full.

Many Indian companies resorted to the FCCBs as a convenient way to raise cheap debt when the country’s stock markets were gripped by exuberance between 2005 and 2008, with the main Sensex index peaking in November last year at more than 21,000 points.

Posted in Currencies, India | 24 Comments »

Osborne Vows More Austerity as Slump Hits U.K. Deficit Plan

Posted by WARREN MOSLER on 30th November 2011

Says it all, sadly.

France and Germany also announce agreement to target 0 deficits for all euro members which
takes the steam out of any relief rally as they solve the solvency issue.

Not much upside for the world economy when it all thinks and acts like this:

Osborne Vows More Austerity as Slump Hits U.K. Deficit Plan

By Gonzalo Vina

Nov 30 (Bloomberg) — Chancellor of the Exchequer George Osborne said Britain faces two extra years of austerity as he sought to shore up his deficit-reduction plans, intensifying a conflict with unions that are staging a mass walkout today.

Osborne used his end-of-year economic statement to Parliament yesterday to announce 23 billion pounds ($36 billion) of additional spending cuts after the Office for Budget Responsibility slashed its forecasts for economic growth. The fiscal watchdog predicted Osborne will need to borrow an extra 112 billion pounds by 2016 and said more than 700,000 public- sector workers will lose their jobs over the next six years.

“Osborne acknowledges that the consolidation program is behind schedule and aims to make up for lost ground with an even longer period of fiscal austerity,” Michael Saunders, chief European economist at Citigroup in London, said in an interview. “The government has no alternative. If they slide, the markets will put the U.K. from Category A to Category B.”

Unions say as many as 2 million public-sector workers will join today’s 24-hour strike over plans to make them contribute more toward their pensions and retire later. Osborne is extending his spending cuts beyond 2015, when they were due to end, risking a backlash from voters in the election due in May of that year.

Posted in Deficit, Government Spending, UK | 17 Comments »


Posted by WARREN MOSLER on 29th November 2011

Still no default…

Posted in ECB | 1 Comment »

Why the IMF thing works for the euro

Posted by WARREN MOSLER on 28th November 2011

As a matter of chance, the euro’s lucky stars fall in line with the latest IMF musings.

Perhaps most important,
the ECB lending to the IMF,
which then lends to euro member nations,
doesn’t count as ‘printing money’ in the Teutonic monetary bible.

To recap:

When the ECB buys bonds,
it credits member bank accounts on the ECB’s spreadsheet.
Those accounts count as ‘money’ while the bonds did not count as ‘money’
So this is said to be ‘printing money’

The ECB then offers different euro accounts,
also data on the same ECB spreadsheet,
that pay interest with relatively short maturities.
This is called ‘sterilization’ because those deposits don’t count as ‘money’

However, when the ECB buys SDR from the IMF loans to the IMF,
and it credits the IMF account at the ECB with euro,
that doesn’t count as ‘printing money.’

Nor does the IMF lending those euro to the likes of Italy count as ‘printing money’

And, while a bit of a stretch,
the IMF was, after all, set up to address balance of payments issues.
And while overall the euro zone doesn’t have a balance of payments issue of any consequence,
it’s not wrong to say the euro nations in question
do have balance of payments issues.
So here’s one place in the world of floating exchange rates between nations
where IMF involvement can be said to actually fit its original mandate.

Furthermore, if there’s one force that can be trusted to impose austerity,
it’s the IMF, of course.

Also interesting is that the IMF takes the credit risk for the loans it makes,
while the ECB takes IMF credit risk on its balance sheet.
This means the rest of world is assuming the risk for the loans to the national govts.

Lastly, while it triggers a massive relief rally,
it’s just Bigfoot kicking the can way down the road,
as the austerity continues to weaken the euro economy,
now to the point of driving up deficits as GDP growth goes negative.

So bringing in the IMF helps Germany preserve it’s ‘max austerity’ image,
kicks the solvency issue down the road,
and all without the ECB ‘printing money’!

So now let’s see if it actually happens.

Merry Christmas!

Posted in ECB, Government Spending | 32 Comments »

France Sees Budget Rules Paving Way for ECB Support Bloomberg

Posted by WARREN MOSLER on 27th November 2011

Another step closer

France Sees Budget Rules Paving Way for ECB

Posted in ECB | 9 Comments »

MMT to the ECB- you can’t inflate, even if you wanted to

Posted by WARREN MOSLER on 26th November 2011

With the tools currently at their immediate disposal, including providing unlimited member bank liquidity,lowering the interbank rate, and buying euro national govt debt, the ECB has no chance of causing any monetary inflation, no matter how hard it might try. There just are no known channels, direct or indirect, in theory or practice, that connects those policies to the real economy. (Note that this is not to say that removing bank liquidity and national govt credit support wouldn’t be catastrophic. It’s a bit like engine oil. You need a gallon or two for the engine to run correctly, but further increasing the oil in the sump isn’t going to alter the engine’s performance.)

Lower rates sure doesn’t do the trick. Just look to Japan for going on two decades, the US going on 3 years, and the ECB’s low rate policies of recent years. There’s not a hint of monetary inflation/excess aggregate demand or inflationary currency weakness from low rates. If anything, seems to me the depressing effect on savers indicates low rates from the CB might even, ironically, promote deflation through the interest income channels, as the non govt sector is necessarily a net receiver of interest income when the govt is a net payer. (See Bernanke, Reinhart, and Sacks 2004 Fed paper on the fiscal effect of changes in interest rates.)

And if what’s called quantitative easing was inflationary, Japan would be hyperinflating by now, with the US not far behind. Nor is there any sign that the ECB’s buying of euro govt bonds has resulted in any kind of monetary inflation, as nothing but deflationary pressures continue to mount in that ongoing debt implosion. The reason there is no inflation from the ECB bond buying is because all it does is shift investor holdings from national govt debt to ECB balances, which changes nothing in the real economy.

Nor does bank liquidity provision have anything to do with monetary inflation, currency depreciation, or bank lending. As all monetary insiders know, bank lending is never reserve constrained. Constraints on banking come from regulation, including capital requirements and lending standards, and, of course credit worthy entities looking to borrow. With the ECB providing unlimited liquidity for the last several years, wouldn’t you think if there was going to be some kind of monetary problem it would have happened by now?

So the grand irony of the day is, that while there’s nothing the ECB can do to cause monetary inflation, even if it wanted to, the ECB, fearing inflation, holds back on the bond buying that would eliminate the national govt solvency risk but not halt the deflationary monetary forces currently in place.

So where does monetary inflation come from? Fiscal policy. The Weimar inflation was caused by deficit spending on the order of something like 50% of GDP to buy the foreign currencies demanded for war reparations. It was no surprise that selling that many German marks for foreign currencies in the market place drove the mark down as it did. In fact, when that policy finally ended, so did the inflation. And there was nothing the central bank could do with interest rates or buying and selling securities or anything else to stop the inflation caused by the massive deficit spending, just like today there is nothing the ECB can do to reverse the deflationary forces in place from the austerity measures.

So here we are, with the ECB demanding deflationary austerity from the member nations in return for the limited bond buying that has been sustaining some semblance of national govt solvency, not seeming to realize it can’t inflate with its monetary policy tools, even if it wanted to.

Post script:

The only way the ECB could inflate would be to buy dollars or other fx outright, which it doesn’t do even when it might want a weaker euro, as ideologically they want the euro to be the reserve currency, and not themselves build fx reserves that give the appearance of the euro being backed by fx.

Posted in Deficit, ECB, EU, Government Spending, Inflation, Interest Rates, Japan | 73 Comments »

Fed Chairman Eccles 1933 statement

Posted by WARREN MOSLER on 26th November 2011

“Individuals, corporations, cities, and States can not, of themselves, do anything except play according to the rules of the present money system and make their outgo balance their income, or ultimately “go broke.” Most of them are unable, much as they may desire, to give consideration to helping the general situation except as they may influence the action of the Federal Government, which is in an entirely different category, it being able to make and change therules of the game…A State, of course, is in the same financial category as corporations and individuals in that they do not have the power of issuing money or credit. The Federal Government is entirely in a different category because it controls the money system.” ~ Marriner Eccles (February 13 – 23, 1933 Senate Hearing Committe – prior to becoming Fed Chairman)

Posted in Fed, Government Spending | 18 Comments »

U.S. and Eur Data/GDP Downgrades

Posted by WARREN MOSLER on 23rd November 2011

Karim writes:

U.S. data on the soft side (October)

  • Most notable is core durable goods orders (capex has been gwth leader of late) falling 1.8% and 3mth annual rate slowing to 4% from 7.3%
  • Core shipments (more important for current quarter growth) down 1.1%
  • Personal spending up 0.1%.
  • Personal income up 0.4% (mostly via wages) and savings rate up from 3.3% to 3.5%
  • Headline Price index-0.1% and core unchanged, so reasonable increase in real incomes. Core PCE Index now 1.5% 3mth annualized vs 2% last month

EUR Composite PMI ‘surprises’ to upside in November, rising from 46.5 to 47.2

  • Interesting that manufacturing (more volatile and more of a leading indicator) much weaker than services.
  • Also, German new orders fall 2.6pts to 42.6

Q4 GDP estimates in U.S. being shaved 0.25-0.50% on the data. Current range 2.5-3.25%.
Failure to extend payroll tax cut would have impact almost entirely in Q1 2012 (annual withholding ceilings typically reached early in the year)-about 1% on GDP.

European estimates are about -1.5% annualized for both Q4 and Q1. Germany among the weakest (due to manufacturing) with estimates in the -2.5% area.

PMI data in Europe has had a very good track record signaling ECB policy rate changes. This data pretty much cements another rate cut next month.

Posted in Email | 25 Comments »

DJ Europe Mulling New Role For ECB, Lending To IMF-Greek FinMin

Posted by WARREN MOSLER on 23rd November 2011

Hint of German support?

*DJ Europe Mulling New Role For ECB, Lending To IMF-Greek FinMin

Posted in ECB, Germany, Greece | 31 Comments »

EU Proposes Intrusive Control of Euro Zone Budgets

Posted by WARREN MOSLER on 23rd November 2011

Another prelude to Germany supporting the ECB funding support that will end the solvency issue falling into place:

EU exec proposes intrusive control of euro zone budgets

By Luke Baker and Jan Strupczewski

November 23 (Reuters) — The Commission, the executive arm of the 27-member European Union, presented a draft regulation which would allow it to review draft budgets of euro zone countries by mid-October and ask for revisions if they were not in line with EU budget rules.

The budget drafts of euro zone countries would have to be based on independent forecasts.

The second regulation would create a legal basis for heavy surveillance of policies of a country either already getting emergency financial aid from the euro zone or facing serious financial instability.

“To return to growth, member states need to raise their game when it comes to implementing their commitments to structural reforms, as well as embrace deeper integration for the euro area,” Commission President Jose Manuel Barroso said.

“The goals driving this package — economic growth, financial stability, budgetary discipline — are linked to each other. We need all of them if we are to move beyond the current emergency towards a Europe in which solidarity is balanced by strengthened responsibility,” Barroso said.

Once the tighter oversight and control of euro zone national fiscal policy is in place, the 17 countries now sharing the euro could jointly borrow from the market through “stability bonds.”

The Commission outlined three main options for such joint debt issuance without making any recommendations on which might be best.

“The Commission makes clear that any move towards introducing stability bonds would only be feasible and desirable if there were a simultaneous strengthening of budgetary discipline,” it said in a statement.

Posted in ECB, Germany | 18 Comments »


Posted by WARREN MOSLER on 23rd November 2011

Didn’t say ‘only’ objective. Subtle shift?


Posted in ECB | 19 Comments »

CNBC’s John Carney invokes MMT again

Posted by WARREN MOSLER on 23rd November 2011

How High Should Taxes Get on the Wealthy?

By John Carney

Good to see John Carney invoking MMT again!

My conclusion would have been with today’s shortage of aggregate demand we are grossly over taxing for inflation prevention, and so, a FICA suspension is the way to go vs a tax cut for the rich.

But it wasn’t my story.


Posted in Inflation | 76 Comments »

relief rally musings

Posted by WARREN MOSLER on 22nd November 2011

The German 10 year just traded above 1.9%.
The 10th plague is now beginning to threaten the Pharaoh.

If I were cynical I’d think it would go down something like this:

First, German insiders give the nod to their cronies.
The Great European Relief Rally begins.
The euro begins to firm, stocks start to rally, etc.
Then, noises start coming out of Germany to the effect that
they might consider ECB support if austerity could be guaranteed,
causing prices to suddenly gap higher as shorts try to cover with no sellers in sight.

Posted in EU, Germany | 31 Comments »


Posted by WARREN MOSLER on 21st November 2011

Seems the logical consequence of hair cutting Greek debt and announcing it may happen to other member nations?

That said, would not surprise me to soon be hearing hints of something like:
‘ECB bond buying not necessarily inflationary if combined with austerity’ coming out of Germany,
triggering a massive ‘relief rally’ that will last until the reality of the austerity part sinks (syncs) in,
as the 10th plague infects the German bonds markets.


Posted in ECB, Inflation | 27 Comments »

Germany takes the world down, take 3?

Posted by WARREN MOSLER on 21st November 2011

Looks like for the third time in the last 100 years the world fiddles while Germany torches it?

Germany now stands pretty much alone in objecting to the ECB writing the check on the grounds that it’s inflationary, when it’s clearly not.

But, unfortunately, the rest of the world’s political and economic leadership doesn’t have what it takes to get through to them.

And the economic destruction this is causing far exceeds the destruction caused by all the shooting wars in history, as the death toll from the consequent global unrest mounts as well.

On Mon, Nov 21, 2011 at 7:05 AM, wrote:


(BBK = Germany’s Bundesbank)


Posted in ECB, Germany | 26 Comments »

Fed’s Williams:Fiscal Policy Actions ‘Badly Needed’

Posted by WARREN MOSLER on 20th November 2011

A step in the right direction:

Fed’s Williams:Fiscal Policy Actions ‘Badly Needed’

Fri Nov 18 14:04:45 2011 EST

–The Federal Reserve’s actions have not been enough to deliver a robust recovery

–The recovery has been hurt by the decline in housing and stock prices, tightening of credit and uncertainty in Europe

–Fiscal policy actions to reduce uncertainty and stimulate recovery are ‘badly needed’

By Anusha Shrivastava

NEW YORK-(Dow Jones) — The Federal Reserve’s actions during the past four years have not been enough to deliver a robust recovery so fiscal policy actions are “badly needed”, said a central bank official on Friday.

“What would be especially helpful at this juncture are fiscal policy actions that work in tandem with monetary policy to stimulate the economy,” said John Williams, president of the Federal Reserve Bank of San Francisco, speaking at the Central Bank of Chile in Santiago.

Williams, who expects the U.S. unemployment rate to remain above 7% for three more years, named three “powerful currents” slowing the pace of recovery.

There has been a “massive destruction of wealth” because of the financial crisis, stemming from a housing collapse, he said.

Second, there’s been a severe tightening of credit because of the decline in residential property prices and the wave of foreclosures.

The heightened uncertainty in Europe and overall health of its financial system is another contributory factor diminishing the appetite for risk such that investors are fleeing to safe assets like U.S. Treasurys, he added.

Given the weakness in the economy and the uncertainty impeding recovery, Williams called for fiscal policy actions that work with monetary policy to boost the economy.

One example of such a policy is the recently announced U.S. government initiative to make it easier for homeowners whose houses are now of lower value than when they bought them, to take advantage of very low rates and refinance their mortgages.

“This will trim monthly payments for some households and could reduce foreclosure rates,” Williams said. “It could also eventually provide a modest boost to consumer spending.”

Posted in Deficit, Government Spending | 16 Comments »

SPR release winding down

Posted by WARREN MOSLER on 20th November 2011

This chart of West Texas crude prices vs Brent north sea crude prices was done a few days ago, with the spread subsequently narrowing further to under $10.

As previously discussed a few weeks ago, with the Strategic Petroleum Reserve release initiated by President Obama now winding down, the glut in Cushing that looks to have caused West Texas crude prices to fall to about a $25 discount to Brent crude and world prices in general looks to be coming to an end. Additionally, to help ensure it doesn’t happen again, it was announced the flow in a large pipeline will soon be reversed to allow crude to flow out of Cushing.

As a consequence the WTI price has been rising steadily and looks to me to be reconverging with Brent prices.

And seems to me, watching the news broadcasting, the increase is at best very disconcerting to the US consumer in front of the holiday shopping season.


Posted in Oil | No Comments »

The turkeys have voted for Thanksgiving

Posted by WARREN MOSLER on 20th November 2011

Reader’s comment on the post on Spanish voters supporting austerity:

Adam (ak) Submitted on 2011/11/20 at 4:05pm

So in the country where the official unemployment rate is 22.6% the party promising further fiscal austerity has an unassailable lead? Awesome. The turkeys have voted for Thanksgiving.

Posted in Uncategorized | 51 Comments »

Spanish Voters Set to Throw Out Socialists in Election

Posted by WARREN MOSLER on 20th November 2011

As previously discussed, there is virtually no political support to leave the euro,
as it’s not intuitively obvious the euro is the problem.

It is intuitively obvious, however, that the problem was irresponsible govt
and so the move towards responsible govt- aka austerity- continues.

The euro economy can be easily ‘fixed’ and in short order.
The ECB can, one way or another, facilitate all funding needs and end the solvency issue.
And the Stability and Growth Pact (SGP) can be modified to allow deficits sufficient to sustain aggregate demand.

Currently Germany continues to be obstructing the elimination of the solvency issue,
even as market forces are now begining to weaken German bonds.
And there are no member nations yet supporting readjusting the SGP to allow higher deficits.

So my best guess is Germany will soon recognize what most of the financial community has recently been voicing- ECB bond buying combined with austerity is not inflationary- opening the door to the ECB bond buying being an EU sanctioned policy of the institutional structure to ensure solvency.

That will trigger a massive ‘relief rally’ that will fade as the reality of the depressing nature of the
austerity takes over.

It could also sideline the discussion of Greek haircuts and default discussion in general.

Spanish Voters Set to Throw Out Socialists in Election

November 20 (Reuters) — Spaniards are expected to throw out the Socialists they blame for a disastrous economic situation in an election on Sunday and to vote in a center-right party likely to dole out more bitter medicine in the form of public spending cuts.

Opinion polls show the People’s Party (PP), led by Mariano Rajoy, has an unassailable lead over the ruling Socialists, who have led the country from boom to bust in seven years in power.

Voters are angry with the Socialists for failing to act swiftly to prevent the economic slide and then for bringing in austerity measures that have cut wages, benefits and jobs.

Yet people are now resigned to further slashes in spending on health and education in the midst of a European debt crisis that has toppled the governments of Ireland, Portugal, Greece and Italy and pushed Spain’s borrowing costs ever higher.

Posted in EU, Germany, Greece | 5 Comments »