Monthly Archives: January 2013

Platinum Coin Idea Is Rejected by White House

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This is far more problematic than markets realize.

The President had a choice. The debt ceiling thing expresses ‘the will of Congress’ where Congress makes laws for the executive branch to execute. The President has also sworn to uphold the Constitution which says the President has to pay the nation’s bills. The President has so far decided to abide by the will of Congress.

And, in any case, the Republican leadership says the fight is going to be about modifying the already in place sequestrations.

So seems it’s now ‘advantage Republicans’ on the spending cuts issue.

The economy hitting the debt ceiling and going cold turkey to a balanced budget is a far more catastrophic event than even going over the full cliff would have been, as it disables the ‘automatic fiscal stabilizers’ and instead triggers a pro cyclical downward spiral in output and employment. That is, when the $25 billion/week spending cuts kick in and the economy slows, the falling tax revenues mean spending has to be cut more, nor can total spending on unemployment ‘automatically’ go up, etc.

And don’t forget about the Jan 1 FICA hike now beginning to kick in which also seems markets are not discounting.

Platinum Coin Idea Is Rejected by White House

January 12 (Reuters) — The White House on Wednesday sees little profit in the notion of minting $1 trillion platinum coin as an escape hatch to avoid a debt default if Congress balks at raising the U.S. debt limit.

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Japan should buy the platinum coin?

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Abe revived this panel. Lots of cross pressures as to whether to increase deficit spending or not. If not, they could continue to be the land of the rising yen, as ‘monetary policy’ short of actual fx purchases doesn’t cut it.

As previously discussed, while reported reserves have remained flat since the last announced intervention, there are signs actual fx reserves have been rising from what is functionally intervention not counted as official intervention, but I can’t yet say for sure.

And note that the purchase of a US Treasury $1 trillion platinum coin would weaken the yen and put off the US debt ceiling issue…

;)

Govt Starts Talks On Fiscal Reform At Revived Key Policy Panel

TOKYO (Kyodo) — A revived Japanese government economic policy panel started discussions Wednesday on how to rehabilitate the nation’s finances in the longer term, with the government’s plan to issue more debt to fund a stimulus package stirring concern over the nation’s fiscal health.

The meeting of the Council on Economic and Fiscal Policy was the first in three and a half years. The panel had played a leading role in putting together economic and fiscal policy under the government of Prime Minister Junichiro Koizumi of the Liberal Democratic Party.

During Wednesday’s meeting of the panel revived by Prime Minister Shinzo Abe, who took office on Dec. 26, participants exchanged views on an emergency economic stimulus package slated to be approved by the Cabinet on Friday.

The government led by the LDP, which returned to power in the Dec. 16 general election after three years in opposition, also began discussions on mapping out the basic policy for an initial budget for the next fiscal year starting April and medium-to-long term economic and fiscal policy blueprints.

Abe’s government is considering approving an emergency stimulus package of over 20 trillion yen ($228.7 billion) to boost Japan’s slowing export-reliant economy, and compiling a 13.1 trillion yen extra budget for the current fiscal year to finance it, sources close to the matter said Tuesday.

To cover the shortfall in revenue needed to pay for the supplementary budget, Tokyo is making arrangements to issue an additional 5.2 trillion yen in construction bonds for fiscal 2012, the sources said.

The move has focused attention on how the LDP-led government will show a commitment to restoring Japan’s precarious fiscal health, the worst among major developed countries.

If fears intensify that progress on fiscal reform has stalled, long-term interest rates could spike as investors become reluctant to buy government bonds due to fears of default, dampening corporate and private investment and dragging down the broader economy, some analysts have warned.

The previous government led by the Democratic Party of Japan had set as its fiscal reform target halving Japan’s primary balance deficit — total expenditures in excess of total revenues, excluding interest payments on debt — by the end of fiscal 2015.

Abe is eager to finalize by June the basic fiscal policy, which could include a plan to put Japan on a path toward fiscal restoration, the sources said.

The Council on Economic and Fiscal Policy, first established in 2001 but put on ice after the DPJ took power in 2009, would function as the “control tower” of Japan’s macroeconomic policies, Abe has said.

The Bank of Japan governor is requested to join the council’s meetings along with business leaders and academics, with Abe saying he wants to deepen communication with the central bank chief there.

Abe has pledged to beat the nation’s chronic deflation, urging the BOJ to aggressively ease monetary policy until a 2 percent inflation rate is achieved.

Financial market participants said they are paying attention to whether Abe will put additional pressure on current BOJ Governor Masaaki Shirakawa to do more during the meeting late Wednesday, ahead of the BOJ’s Policy Board meeting on Jan. 21 and 22, at which the central bank is expected to introduce a 2 percent inflation target, as requested by Abe.

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China Loan Share at Record Low Shows Financing Risks

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Lending by state banks there- shelling out funds without much concern about getting them back- is functionally a lot like deficit spending here, and both probably have similarly high multiples as well.

So while ‘normal’ deficit spending is reportedly going up in China, temper that by this kind of decrease in ‘shadow’ deficit spending.

China Loan Share at Record Low Shows Financing Risks

January 9 (Bloomberg) — Chinas bank loans as a share of funding in the economy may have fallen to a record low, highlighting the growth of alternative financing channels that have prompted warnings of rising credit risks.

New yuan loans probably dropped 14 percent last month from a year earlier, according to the median projection in a Bloomberg News survey of 37 analysts ahead of data due by Jan. 15. That would give bank lending a 55 percent share of aggregatefinancing for 2012, based on UBS AG estimates, the least in figures dating to 2002.

The decline underscores the waning ability of official loan data to capture the scale of debt in the worlds second-largest economy as borrowers and investors turn to less-regulated, higher-return shadow-banking products. The Peoples Bank ofChina is putting greater emphasis on aggregate financing and the International Monetary Fund says the growth of nonbank credit poses new challenges to financial stability.

Chinas economic performance in 2013 will be significantly affected by how seriously Chinese regulators are going to treat non-bank financing, said Shi Lei, a Beijing- based analyst with broker Founder Securities Co., who has provided research advice to Chinas securities regulator. While a hands-off approach will help the economy, a crackdown would be really bad for growth.

The PBOC lending figures are among December data in the coming days that will show whether an economic rebound that began in September picked up or slowed last month after a seven- quarter growth slowdown. Trade figures due tomorrow may show exports rose at a faster pace and a Jan. 11 report may indicate inflation accelerated.

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Greg Walden to introduce bill to stop U.S. Treasury from creating trillion dollar platinum coins

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More of the blind leading the blind. Either way Treasury only spends what’s authorized by Congress. And all the coin does is shift interest expense from the Treasury to the Fed.

Illogic is clearly a adaptive trait for holding office. As they say in Church, it’s another mysteriously rushed contradiction wrapped in an enema…

Greg Walden plans to introduce bill to stop U.S. Treasury from creating trillion dollar platinum coins to pay bills and expand debt

U.S. Rep. Greg Walden (R-Ore.) today announced plans to introduce a bill to stop a proposal to mint high-value platinum coins to pay the federal government’s bills.

“Some people are in denial about the need to reduce spending and balance the budget. This scheme to mint trillion dollar platinum coins is absurd and dangerous, and would be laughable if the proponents weren’t so serious about it as a solution. I’m introducing a bill to stop it in its tracks,” Rep. Walden said.

“My wife and I have owned and operated a small business since 1986. When it came time to pay the bills, we couldn’t just mint a coin to create more money out of thin air. We sat down and figured out how to balance the books. That’s what Washington needs to do as well. My bill will take the coin scheme off the table by disallowing the Treasury to mint platinum coins as a way to pay down the debt. We must reduce spending and get our fiscal house in order,” Rep. Walden said.

Within the last week, numerous media reports (example here) have suggested that the U.S. Mint could create trillion dollar platinum coins, which would then be deposited into the Federal Reserve to be used to pay the federal government’s bills or avoid hitting the debt ceiling. Rep. Jerrold Nadler, the ranking member of the Judiciary Committee’s Subcommittee on the Constitution, touted the proposal last week (story here). New York Times columnist and Princeton professor Paul Krugman suggested the idea in an article as well (click here). Other leaders in Washington, including House Minority Leader Nancy Pelosi, have urged the President to raise the debt limit unilaterally without permission from Congress.

Representative Walden, a member of the House Republican leadership, represents the Second District of Oregon, which includes 20 counties in the southern, central and eastern regions of the state.

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Comments from Mervyn King on LCR changes

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Global banking rules make no sense at all to me.
Each CB need only mind the banks its insures.

But until that’s understood we have to suffer through this nonsense.

“This was a compromise between competing views from around the world,” Bank of England Governor Mervyn King said at a briefing following yesterday’s meeting. King chairs the Group of Governors and Heads of Supervision, or GHOS, which decides on global bank rules. “For the first time in regulatory history we have a truly global minimum standard for bank liquidity.”

Banks and top officials such as European Central Bank President Mario Draghi pushed for changes to the LCR, arguing that it would choke interbank lending and make it harder for authorities to implement monetary policies. Lenders have warned that the measure might force them to cut back loans to businesses and households.

“The new liquidity standard will in no way hinder the ability of the global banking system to finance a global recovery,” King said. “It’s a realistic approach. It certainly did not emanate from an attempt to weaken the standard.”

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ecb getting there?

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>   
>   (email exchange)
>   
>   On Jan 6, 2013 6:41 AM, Andrea wrote:
>   
>   Some interesting points made by Ulrich Bindseil and Adalbert Winkler (ECB) in
>   their October 2012 paper
>   
>   How about these authors rethinking fiscal policy in the light of this?
>   ;-)
>   

The results of our analysis are as follows:

• A central bank that operates under a paper standard with a flexible exchange rate and without a monetary financing prohibition and other limits of borrowings placed on the banking sector is most flexible in containing a dual liquidity crisis.

• Raising interest rates to attract funding / capital inflows, while being the standard economic mechanism in normal times, may fail to equilibrate demand and supply in a confidence crisis as higher interest rates make it less likely that borrowers will be able to serve the debt. As a result, within any international monetary system characterized by some sort of a fixed exchange rate, the availability of inter-central bank credit determines the elasticity of a crisis country’s central bank in providing liquidity to banks and financial markets, notably government bond markets. Thus, the sustainability of fixed exchange rate systems depends on the elasticity of inter-central bank credit, i.e. the ability and willingness of the central banks of “safe haven countries” to provide loans to central banks of countries in financial distress (gold standard and peg to another country’s currency) and on the elasticity of liquidity provision by the common central bank (monetary union).

• In a monetary union, like the euro area, international arrangements are replaced by a common central bank that provides lender-of-last-resort lending to banks. In the institutional set-up of the euro area where national central banks are in charge of the actual conduct of central bank operations with a country’s banking system, this provision of liquidity is reflected in the “TARGET2 balances”. At the same time, the comparison of a central bank of a euro area type monetary union with a country central bank operating under flexible exchange rates and a paper standard, like the US Federal Reserve, shows that central banks under the former framework have a similar capacity in managing dual liquidity crises as long as the integrity of the monetary union is beyond any doubt.

• Collateral constraints matter systematically under all monetary frameworks. As a result, a central bank confronted with a dual liquidity crisis has to be in a position to adjust collateral constraints in order to enhance the elasticity of its liquidity provision and to limit bank defaults and a deepening of the crisis. If done prudently, this may actually reduce central bank risk taking.

• Banks and securities markets can be subject to a liquidity crisis. However, while lender of last resort activities vis-à-vis banks are a widely accepted toolkit of a central bank, outright purchases of securities have been a controversial tool of central bank liquidity provision in financial crisis since the days of the real bills doctrine. Monetary financing prohibitions (regarding Governments) are a specific case of banning direct lending or primary market purchases of securities, namely securities issued by governments. If the central bank is either not allowed, or it is unwilling to conduct outright purchases of securities, the banking sector – supported by the central bank – can in principle act as the lender of last resort for debt securities markets. However, this is subject to additional constraints, i.e. the banks’ ability and willingness to perform this role. Moreover, it has specific drawbacks as, for instance, the possibility of diabolic solvency loops between banks, the issuers of debt securities, including the government and the real economy may arise.

• Borrowing limits of banks, i.e. quantitative credit constraints deliberately imposed by the central bank to limit the borrowing of banks from the central bank, accelerate a crisis because – if enforced – they signal to banks and markets that at those limits the central bank’s elasticity of liquidity provision ends. As a result, those limits push all banks (potentially) affected into a state of fear of becoming illiquid and hence into a state of strict liquidity hoarding.

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Federal Reserve Bank of New York on payroll tax multiplier

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>   
>   (email exchange)
>   
>   On Fri, Jan 4, 2013 at 1:20 PM, Scott wrote:
>   
>   Apparently payroll tax cuts work. Who knew? (We did.)
>   

Thanks, Scott!
Likewise the expiration might be more of a drag than anticipated.


A Boost in the Paycheck: Survey Evidence on Workers’ Response to the 2011 Payroll Tax Cuts

By Grant Graziani, Wilbert van der Klaauw, and Basit Zafar

Abstract:

This paper presents new survey evidence on workers’ response to the 2011 payroll tax cuts. While workers intended to spend 10 to 18 percent of their tax-cut income, they reported actually spending 28 to 43 percent of the funds. This is higher than estimates from studies of recent tax cuts, and arguably a consequence of the design of the 2011 tax cuts. The shift to greater consumption than intended is largely unexplained by present-bias or unanticipated shocks, and is likely a consequence of mental accounting. We also use data from a complementary survey to understand the heterogeneous tax-cut response.

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