The 10th plague brought an end to solvency issues, but not yet output issues

Interesting how Germany gravitating to negative growth came at about the same time Draghi announced the ECB will ‘do whatever it takes’

With the ECB now taking national govt insolvency off the table, and member nation rates coming down accordingly, the reason for deficit reduction- solvency- has fallen by the wayside.

So now the EU is free to adjust deficits for optimal output without the former solvency concerns.

With austerity, every professional forecaster revises his GDP estimate down and unemployment up.

With a proactive increase in the deficit, whether via tax cuts or spending increases, every professional forecaster revises his GDP estimate up and unemployment down.

And so relaxing the stability and growth pact to maybe a 7% deficit limit from the current 3% limit would result in forecasts for rapidly rising GDP and rapidly falling unemployment. And with the output gap as large as it is the increased economies of scale with expanding output will likely further promote price stability.

Yet it’s not even a passing thought.

So with deficits now likely high enough to support growth from current levels, if they’d only leave them alone, instead, continuing efforts to proactively reduce deficits = continued widening pressure on the output gap.

U.K. Economy Surges 1% as Britain Exits Double-Dip Recession

Deficit finally large enough for a bit of stability and growth?

U.K. Economy Surges 1% as Britain Exits Double-Dip Recession

By Scott Hamilton and Jennifer Ryan

October 25 (Bloomberg) — Britain exited a double-dip recession in the third quarter with the strongest growth in five years as Olympic ticket sales and a surge in services helped boost the rebound.

Gross domestic product rose 1 percent from the three months through June, the fastest growth since 2007, the Office for National Statistics said in London today. That exceeded the highest estimate in a Bloomberg News survey for growth of 0.8 percent. The median forecast of 33 economists was 0.6 percent. The pound rose after the data were published.

The growth surge reflects a boost from the Olympics and a rebound from the second quarter, when GDP was affected by an extra public holiday. While the data may give some short-term relief to Prime Minister David Cameron’s struggling government, Bank of England Governor Mervyn King said this week that the recovery is “slow and uncertain.” That suggests the figures mask underlying weakness that could warrant further stimulus from the central bank.

“We’re still concerned the U.K. economy is going to be pretty much flat throughout next year,” James Shugg, an economist at Westpac Banking Corp. (WBC) in London, said on Bloomberg Television’s “The Pulse” with Maryam Nemazee. “It all depends how rigidly determined the government is to stick to its deficit reduction plan.”

Ticket Sales

Services, which make up about three quarters of GDP, surged 1.3 percent in the third quarter from the previous three months, the most in five years, the ONS said. Olympic ticket sales are estimated to have added 0.2 percentage points to GDP. Production rose 1.1 percent, the most in more than two years, while manufacturing increased 1 percent. Construction output fell 2.5 percent, a third straight quarterly decline.

The pound extended its gain against the dollar after the report and was trading at $1.6134 as of 10:52 a.m. in London, up 0.6 percent on the day. Bonds declined, pushing the yield on the 10-year government bond up 8 basis points to 1.93 percent.

From a year earlier, GDP was unchanged in the third quarter, the ONS said. That compared with a decline of 0.5 percent forecast by economists in a separate Bloomberg survey.

While today’s data confirm Britain exited its first double- dip recession since 1975, GDP is still 3.1 percent below its peak in the first quarter of 2008. The report also showed that the economy has grown 0.6 percent since the third quarter of 2010, just after Cameron’s coalition government came to power.

Economy ‘Healing’

Cameron urged caution on the GDP data, saying there is “still much to do.” The opposition Labour Party has accused his government of exacerbating the economic slump by sticking to its fiscal squeeze. Ed Balls, Labour’s finance spokesman, said today the economy “remains weak” and “is only just back to the size it was a year ago.”

“There are always one-off figures in all of these announcements but they do show an underlying picture of good and positive growth,” Cameron said. “We’ve got to stick with the program.”

The data today are an initial estimate and the figures are subject to revision when the ONS gets more information. In the second quarter, the decline in GDP was revised up to 0.4 percent from an initially reported 0.7 percent.

Britain is the first of the Group of Seven nations to report GDP data for the third quarter. U.S. growth probably accelerated to a 1.9 percent annual rate after expanding at a 1.3 percent pace the prior quarter, according to a Bloomberg survey before a Commerce Department report tomorrow. It would be the first back-to-back readings lower than 2 percent since the U.S. was emerging from the recession in 2009.

Deficit Reduction

The U.K. data come two weeks before the Bank of England’s Monetary Policy Committee must decide whether to end its stimulus program or extend it beyond 375 billion pounds ($605 billion). Governor Mervyn King said this week that a “zig-zag” pattern of recovery is likely to persist.

Debenhams Plc (DEB), Britain’s second-largest department-store chain, said today that the U.K. experienced “challenging trading conditions during 2012.” Whitbread Plc (WTB) Chief Executive Officer Andy Harrison said the consumer market is “pretty flat” and generating any growth is “jolly difficult.”

Stripping out one-time distortions, the National Institute of Economic and Social Research said on Oct. 9 that third- quarter growth was closer to between 0.2 percent and 0.3 percent.

Inflation Cools

Still, recent data have shown pressure on consumers easing. Inflation cooled to the slowest in almost three years in September, while retail sales increased more than forecast. Payrolls rose to a record in the quarter through August, pushing the unemployment rate down to 7.9 percent from 8.1 percent.

“At this stage, it is difficult to know whether some of the recent more positive signs will persist,” King said on Oct. 23. “The MPC will think long and hard before it decides whether or not to make further asset purchases. But should those signs fade, the MPC does stand ready.”

Elsewhere in Europe, Sweden’s Riksbank kept benchmark interest rates unchanged at their lowest level since early 2011 and said further easing has become more probable as growth slows in the largest Nordic economy.

CEOs Call for Deficit Action

So much for the legacy of corporate America:

CEOs Call for Deficit Action

By David Wessel

October 25 (WSJ) — Chief executives of more than 80 big-name U.S. corporations, from AetnaInc. to Weyerhaeuser Co., are banding together to pressure Congress to reduce the federal deficit with tax-revenue increases as well as spending cuts.

The CEOs, in a statement to be released on Thursday, say any fiscal plan “that can succeed both financially and politically” has to limit the growth of health-care spending, make Social Security solvent and “include comprehensive and pro-growth tax reform, which broadens the base, lowers rates, raises revenues and reduces the deficit.”

Does a central bank need equity?

Just when you thought they were trying to get the yen lower…
;)

It’s still the blind leading the blind, globally.

Does a central bank need equity?

Views are split on how much importance to attach to a central bank’s losses, ie, equity impairments. BoJ Governor Shirakawa says some equity is necessary, but Gakushuin Professor Iwata maintains that the deterioration of the BoJ’s balance sheet is not a problem because a central bank, as the only supplier of high-powered money, can operate without equity. If focusing on a central bank’s “parent company” accounts, equity may not need to be over-emphasized. But considering the possibility of a decrease in the purchasing power of currency holders, it probably has some meaning.

Posted in CBs

Bretton Woods Transcripts

Publication details
The Bretton Woods Transcripts
Edited by Kurt Schuler and Andrew Rosenberg
New York: Center for Financial Stability, 2012
About 800 pages (400,000 words)
Release date: October 24, 2012
Price: $9.00 (e-book)
ISBN-13: 9781941801000

Book Website

Amazon Link

Summary: The Bretton Woods Transcripts were never intended for publication. They give word-for-word reports of many meetings of the 1944 international financial conference in Bretton Woods, New Hampshire. The conference established the International Monetary Fund (IMF) and the World Bank, and began a new era of international economic cooperation that has lasted from the end of World War II to the present. Today we are still grappling with many of the same issues that the conference debated: how to balance the interests of large and small economies, how much power international organizations should have, and how they should work. The Bretton Woods Transcripts show how a previous generation dealt with those issues so successfully that the Bretton Woods conference remains a landmark event.

Australia cuts spending to preserve surplus as mining boom slows

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Australia cuts spending to preserve surplus as mining boom slows

October 22 (Reuters) — Australia’s government announced A$16.4 billion ($17 billion) in new savings and tax measures over four years on Monday to protect a wafer-thin budget surplus for 2012/13, opening the way for the central bank to further cut interest rates as early as next month.

Releasing the government’s mid-year budget update, Treasurer Wayne Swan said GDP growth would be slower in the year to June 30, 2013, and come in at 3.0 percent compared to May’s budget forecast of 3.25 percent, as the country’s mining boom slowed.

Financial markets have priced in up to two more interest rate cuts over the coming months and economists said the extra fiscal tightening could now see the Reserve Bank of Australia ease policy at its policy meeting on November 6.

“The prospect of small budget surpluses means that fiscal policy settings have been tightened a notch. It also means that monetary policy can be further eased without a significant domestic inflation risk,” CBA Economics senior economist Michael Workman said.

A fall in tax revenue, slower economic growth and lower commodity prices led to the downward revision in this financial year’s expected surplus to A$1.1 billion, from May’s budget forecast for a surplus of A$1.5 billion.

Government revenues have also been hit by lower commodity prices, with the controversial mining tax on iron ore and coal mining profits to bring in A$1 billion less this year and A$1.1 billion less the following year compared to the May budget forecasts.

Iron ore prices have fallen around 15 percent, thermal coal 9 percent and coking coal 30 percent since the mining tax started in July, and the government now forecasts the minerals resources rent tax to raise A$9.1 billion over four years, compared to the May budget forecast of A$13.4 billion.

“Global growth has slowed in recent months, with the recession in the euro area and the subdued recovery in the United States weighing on growth in our region,” Swan said.

“The weaker global outlook and lower than expected commodity prices, along with the general easing of price pressures in the economy, are again slowing the recovery in tax revenue.”

Despite the slowdown, Australia remains one of the few developed nations to have forecast a budget surplus for the current year, with net debt peaking at 10 percent of GDP last financial year and well below the average net debt projected to peak at 95 percent of GDP in 2016 for major advanced economies.

The Reserve Bank of Australia has cut official interest rates by 100 basis points in 2012, with the latest 25-point cut in October. Markets are betting on a further rate cut by the end of the year.

The biggest saving in the budget update includes A$8 billion over four years by introducing monthly pay-as-you-go company tax payments for large companies.

It will also raise A$445 million over four years by removing some in-house fringe benefits tax arrangements on salary sacrificing, and raise A$520 million over four years from higher charges for visas to visit and work in Australia.

Australia’s peak business group the Australian Chamber of Commerce and Industry condemned the budget changes and said most of the imposts would be borne by companies.

“Business is again in the firing line when it comes to helping out the budget bottom line,” chamber chief executive Peter Anderson told reporters.

“There is no doubt that many of the decisions in today’s statement will be negative for both households and business, it will be negative for confidence, negative for the economic outlook and negative for economic certainty.”

Swan has delivered consecutive deficit budgets since his first budget in 2008, due to stimulus spending to help Australia avoid recession after the 2008 global financial crisis.

The Labor government, struggling in the polls, is due to face elections in the second half of 2013 and is determined to restore the budget to surplus before it faces the voters, to head off opposition attacks on its economic credentials.

Forbes article: No, the US will not go into a debt crisis, not now, not ever

>   
>   (email exchange)
>   
>   On Fri, Oct 19, 2012 at 1:09 PM, wrote:
>   
>   Author is self-described conservative.
>   

No, The United States Will Not Go Into A Debt Crisis, Not Now, Not Ever

By Pascal-Emmanuel Gobry

October 19 (Forbes) — If there’s one article of faith in Washington (and elsewhere), it’s the idea that the United States might get into a debt crisis if it doesn’t get its fiscal house in order.

This is not true.

The reason why it’s not true is because we live in a fiat currency system, where the United States government can create an infinite number of dollars at no cost to meet its obligations. A Treasury bill is a promise that the government will give you US dollars– something that the United States government can produce infinitely and at no cost.

That’s the reason why interest rates on United States debt have only gone down even as the debt has ballooned. That’s the reason why Great Britain has very low rates on its debt despite having very high debt-to-GDP. That’s the reason why Japan has an astounding debt-to-GDP ratio and still enjoys some of the lowest rates ever. Investors have bet for so long that there would be a run on Japanese debt and have ended up so ruined that in financial circles that trade is called “the Widowmaker”. (Here’s a more detailed analysis by my former colleague Joe Weisenthal at Business Insider.)

Well, what about Argentina? Argentina had to default on its debt because it had pegged its currency to the US dollar. It wasn’t sovereign with regard to its currency since it had to maintain its currency’s peg. It wasn’t Argentina’s debt that caused it to default, it was its currency peg.

What about Greece? Same thing. Greece hasn’t used its own currency for ten years. Of course it’s going bankrupt.

Does it seem that strange that governments can’t run out of money?

You don’t have to take my word for it. How about Alan Greenspan? He said (PDF): ”[A] government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit.”

But waaaaaaait, you shout, what about inflation? If the government prints money like crazy, won’t that create inflation?

Well, in theory, yes. But probably not. Why is that? Because the US has an even bigger advantage than just being sovereign in its own currency (hi Greece), it also holds the reserve currency. The US dollar is the main currency that is used in most international transactions, it is held by all of the world’s central banks, and so forth.

Why is this important? Well, another way to define inflation is to say that the supply of a currency gets out of whack with its demand: too much currency chasing too few people who want to hold it, and so its value drops. Well, when you have the reserve currency, the demand for your currency is always going to be extremely strong. There’s always going to be tons of people, all around the world, who want to use US dollars, because their transactions are conducted in US dollars. (And it’s highly unlikely that this will change soon–being the reserve currency has a network effect, meaning everyone uses the dollar as the reserve currency because everyone else uses it, creating a self-reinforcing cycle that’s extremely hard to break.)

In other words, while in theory printing tons of money could create inflation, in practice demand for the dollar is so high–and for structural reasons that have very little to do with how the US economy is doing at a particular point in time–that it’s hard to imagine a circumstance under which the US government would have to print so much that it would cause significant inflation.

And even if it did–well, for all the bad memories we have about it, the Stagflation of the 1970s was many things, but it was not Greece. Life in the 1970s was still relatively okay, despite the stagflation. That is to say, even in the extremely unlikely event that the government had to print so much money to get out of its debt that it caused moderate inflation, it still would not be a debt crisis of the kind that Greece and Spain are under right now. (Hyperinflation, meanwhile, is even less of a danger, since in recorded history it only happens in cases of not just reckless money printing, but also extremely serious exogenous shocks such as war, regime change, etc.)

Why am I writing this?

After all it’s already common knowledge among economists, Fed officials, and an increasing number of sophisticated investors.

Maybe so, but it’s still not common knowledge among politicians and among the general public. A lot of people still think that the US is under some risk of one day becoming like Greece, and it’s distorting our public debate.

It’s especially distorting it on the Right, where hysteria about deficits, and debt, and becoming like Greece has reached a fever pitch. Paul Ryan, especially, has framed his entire message on entitlement-cutting on the flawed premise that the US needs to cut its entitlement or it will suffer a debt crisis. This message, in turn, has infected broad swathes of the conservative movement (including very smart people in it), a movement that I consider myself a member of and want to see in strong intellectual health. But very few liberals–certainly no Democratic elected officials that I’m aware of, certainly not the President and the Vice President–are disputing the premise that the US is in any danger of a debt crisis.

In future posts, I will try to look at what the conservative movement can do to move past the idea of the debt crisis, and what it means.