Interest income loss from rate cuts

Word’s getting around, from CS:

The side-effect of the Fed’s near-zero interest medicine – the collapse in personal interest income over the last few years. The decline in interest income actually dwarfs estimates of debt service savings. Exhibit 2 compares the evolution of household debt service costs and personal interest income. Both aggregates peaked around $1.4 trn at roughly the same time – the middle of 2008. According to our analysis of Federal Reserve figures, total debt service – which includes mortgage and consumer servicing costs – is down $206bn from the peak. The contraction in interest income amounts to roughly $407bn from its peak, more than double the windfall from lower debt service.

Saudi Crude Oil Production

Saudi production up a tad for July.

With the Saudis posting prices and letting their clients buy all they want at the posted prices, this shows marginal global net demand has yet to fall off, and, in fact increased a bit.

And, if Saudi excess capacity isn’t as high as the 12.5 million bpd reported a relatively small supply disruption could result in an immediate spike in price.

Trade Weighted Euro vs EU Trade Balance

Interesting dynamics at work. Trade can drive the currency and/or the currency can drive trade.

Looks to me like early on it was the trade that was driving up the currency, But more recently the currency looks to be driving trade.

That is, portfolio managers have been shifting out of euro due to the crisis, cheapening it to the point where the trade flows are on the other side of their portfolio shifting.

For example, someone selling his euro for dollars is effectively selling them to an American tourist buying tacos in Spain. Euros shift from the portfolio manager to the Spanish exporter.

Trade flows are generally large, price driven ships to turn around, and continuous as well. Portfolio shifts, while they can also be large, are more often ‘one time’ events, driven by fear/psychology, as has likely been the case with the euro. So a turn in psychology that ‘rebalances’ portfolios to more ‘normal’ ratios can be very euro friendly.

>   
>   (email exchange)
>   
>   This was an interesting chart from Nomura that came out over the weekend discussing
>   the current account against the portfolio flows – suggests that the portfolio flows
>   have turned significantly negative for Europe and are much bigger than the positive
>   effects of the current account.
>   

Yes, agreed. this says much the same story I was telling, only better!

Eurogroup chair sees decisions soon in debt crisis

Note that past remarks indicate the euro leaders equate ‘success’ with ‘strong euro’, particularly the ECB, with its single mandate.

So with the euro reacting positively to Draghi’s ‘pledge’, which came after a decline in the euro, more of same is encouraged.

Eurogroup chair sees decisions soon in debt crisis

By Geir Moulson

July 29 (AP) — The German and Italian leaders issued a new pledge to protect the eurozone, while the influential eurogroup chairman was quoted Sunday as saying that officials have no time to lose and will decide in the coming days what measures to take.

The weekend comments capped a string of assurances from European leaders that they will do everything they can to save the 17-nation euro. They came before markets open for a week in which close attention will be focused on Thursday’s monthly meeting of the European Central Bank’s policy-setting governing council.

Last Thursday, ECB President Mario Draghi said the bank would do “whatever it takes” to preserve the euro — and markets surged on hopes of action.

German Chancellor Angela Merkel and Italian Premier Mario Monti “agreed that Germany and Italy will do everything to protect the eurozone” in a phone conversation Saturday, German government spokesman Georg Streiter said, a statement that was echoed by Monti’s office.

That was nearly identical to a statement issued Friday by Merkel and French President Francois Hollande, which followed Draghi’s comments.

mmt euro discussion origins

This is from Pavlina’s paper for those of you tracing origins of MMT euro discussion:

Link here.

Notice how in private correspondence Mosler applies the same logic in analyzing the ramifications of the restrictions on deficit spending in the current plan for European Monetary Union:

Operating factors will require reserve adds and drains to keep the system in balance and maintain control of the interbank rate. However, the ECB is able only to act defensively, like all CBs [Central Banks]. It cannot proactively lend Eurosa reserve add, without an offsetting drain. The deficit spending I refer to is needed to offset the need of the private sector to be a net nominal saver in Euros. In the currently proposed system, even the increasing demand for currency in circulation must be accommodated via collateralized loans from the ECB. Net nominal wealth of the system cannot increase. The private sector demand for an increase in net nominal wealth will have to be from the reverse happening at the member nation level. If member nations are restricted from doing this [to deficit spend], a vicious deflationary spiral will result. (Mosler, 1996)

MERKEL, HOLLANDE READY TO DO ANYTHING TO PROTECT EURO

Seems the turning point may have been early June when Trichet made a proposal that included the ECB, as previously discussed.

And note, also as previously discussed, it’s all about ‘the euro’ meaning ‘strong currency.’

So a big relief rally with the solvency issue resolved, and then just the reality of a bad economy, and a too strong euro with no politically correct way to contain it, as dollar buying is ideologically all but impossible.

Also, as previously discussed, member govt deficits seem high enough for modest improvement, absent further aggressive austerity measures.

*MERKEL, HOLLANDE READY TO DO ANYTHING TO PROTECT EURO REG
*GERMAN CHANCELLERY COMMENTS IN E-MAILED STATEMENT
*GERMAN CHANCELLERY COMMENTS ON MERKEL-HOLLANDE TELEPHONE CALL

History of MMT and the euro, 1996 Bretton Woods Conference

Found this on the net in the PK archives.
Shows MMT was on it well before this date.
Feel free to distribute

To: PKT Academics
Re: Bretton Woods Conference

Confirmed attendance includes senior staff from Deutchebank,
Credit Suisse, J.P. Morgan, Banker’s Trust, Salomon Bros,
Lehman Bros, Harvard Management, III, Petrus, Paine Webber,
Paribas, and BZW. A keynote speaker will be Professor Charles
Goodhart from the LSE. Bernard Connolly will be the historian.
Speakers for each topic are currently being arranged.

There is currently room for two academic representatives.
Please contact me at mosler@xxxxxxxx if you have interest.

A FRAMEWORK FOR ECONOMIC ANALYSIS

An Invitational Conference

Bretton Woods, New Hampshire

June 12-15, 1996

The purpose of this conference is to bring together a selected
group of portfolio managers, analysts, researchers
traders, and academics who have a common understanding
of monetary operations.

The objective of this conference is to achieve agreement on the use
of a common conceptual framework for undertaking
contemporary macroeconomic analysis.

Portfolio managers in attendance are responsible for well over
$50 billion in assets. The economists and analysts from the
international dealer community represent some of the world?s
largest and most sophisticated fixed income trading and sales
operations.

We believe that this group has the potential to establish an international
standard for the presentation and analysis of economic data.

Several of the fundamentals are Post Keynesian…

Deposit money is endogenous
Central Banks set short term rates exogenously
Deposits exist solely as the result of loans

Extension of these fundamentals includes…


Internal sovereign debt functions as interest
rate support
Taxes create a demand for the goverment’s
currency
Fiat currency is defined exogenously

Conference Moderator……..Warren B. Mosler

Wednesday, June 12, 1996

11:30 AM Welcome and Introduction
12:00 PM Luncheon
12:30 PM History of the Awareness of Monetary Operations
Charles Goodheart

MONETARY OPERATIONS

1:00 PM Review of the Fundamentals of Monetary Operations
1:30 PM Monetary Policy Options


MACROECONOMIC FUNDAMENTALS

2:00 PM The function of Government Securities
2:30 PM Currency Definition
3:00 PM Fiscal Policy Options and Implications


EXTERNAL DEBT

3:30 PM Review of Current Conditions
4:00 PM Macro-economic Implications
4:30 PM World Bank, IMF Policy Implications
6:00 PM Hor?s d?ouvres
7:00 PM Dinner

THURSDAY, JUNE 13

ESTABLISHING THE FRAMEWORK

9:00 AM Integrating Foreign Trade, Investment, Fiscal and Monetary
Policy
10:00 AM Full Employment, Zero Inflation Model
11:30 AM Lunch

RAMIFICATIONS OF MONETARY UNION

1:00 PM Current Political Situation
Bernard Connolly
2:00 PM Maastricht Fiscal Criteria Implications
3:00 PM Post 1999 Credit Implications
3:30 PM Functionality of the Euro
4:30 PM Drafting a Consensus
6:00 PM Hor’s d’Ouvres
7:00 PM Dinner

FRIDAY, JUNE 14, 1995

Review and Discussion

Warren B. Mosler
Director of Economic Analysis
III Finance

See “Soft Currency Economics:”

June DGOs/July 20 Claims-Weaker CapEx; Jumpy Claims


Karim writes:

June DGOs/July 20 Claims-Weaker CapEx; Jumpy Claims

  • Durables data was unequivocally weak. Core orders (ex-defense and aircraft) were down 1.4%. The 3mth annualized rate is now -5.1%, a steady decline from the double digit growth pace of 2011. This feeds into Bernanke’s view that some of the gains in employment and capex in the past year were corrections for overly deep cuts in 2008-09 rather than the start of a new uptrend.
  • Core shipments were up 1.2%. That has greater implications for Q2 GDP (out tomorrow), whereas the orders data has greater implications for Q3 and Q4. Expect a slightly above consensus GDP number tomorrow (1.8% vs 1.4% consensus).
  • Claims dropped by 35k to 353k. Even though the labor department stated there were no quirks, +/- 35k weekly swings in the data as we’ve had for 3 straight weeks does seem quirky.
  • The 4-week average of claims did drop to 367k, the lowest since March.
  • At the very least, the report suggests the labor market is holding up at worst, and suggests another 100k-type gain in payrolls for July.

ECB’S NOWOTNY SEES ARGUMENTS FOR GIVING ESM A BANKING LICENSE

Yes, I think it’s all still happening as suggested last month after Trichet proposed a plan that included the ECB.

Lots of market vol, doubts, fears, etc. and all for good reason as it could fall apart as easily as it could all succeed. I still lean towards the latter.

From Dave Vealy:

NOWOTNY SAYS ESM GAINING BANKING LICENSE IS ONGOING DISCUSSION
NOWOTNY NOT AWARE OF `SPECIFIC DISCUSSIONS’ WITHIN ECB ON ESM
ECB’S NOWOTNY SEES ARGUMENTS FOR GIVING ESM A BANKING LICENSE

From what I am aware, first time an ECB official raises this issue. A significant positive surprise if this is the case, as it would signficantly increase the ESM’s capacity for intervention.

ECB’S NOWOTNY SEES ARGUMENTS FOR GIVING ESM A BANKING LICENSE
ECB’S NOWOTNY COMMENTS IN INTERVIEW WITH BLOOMBERG
NOWOTNY SAYS EURO-AREA ECONOMIC DIVERGENCES ARE INCREASING
NOWOTNY SAYS INFLATION WILL SLOW, ECB DOESN’T SEE DEFLATION
NOWOTNY URGES AGAINST RUSHING ECB BANK SUPERVISORY ROLE
NOWOTNY: ECB NOT TALKING ABOUT NEGATIVE DEPOSIT RATE FOR NOW
NOWOTNY SAYS ESM GAINING BANKING LICENSE IS ONGOING DISCUSSION
NOWOTNY NOT AWARE OF `SPECIFIC DISCUSSIONS’ WITHIN ECB ON ESM