Author Archives: WARREN MOSLER

Euro news

Posted on by


[Skip to the end]

(an email exchange)

   
>   On Tue, Oct 14, 2008 at 12:30 PM, Karim wrote:
>   
>   BN 11:02 Lenihan Says Irish Economy to Contract Next Year by 0.75%
>   
>   BN 11:02 Ireland’s 1% Levy will apply to all incomes
>   
>   BN 11:01 Ireland’s 2% Income Levy will apply over 100,000 Euros
>   
>   Ireland raising income taxes to pay for bank bailouts; also
>   raising VAT and fuel taxes.
>   
>   If others do same, will pressure ECB to cut rates further to offset economic impact.
>   

Yes, but rate cuts won’t offset fiscal drag.

Instead, the budget deficit will rise due to falling revenues and rising transfer payments, and Ireland’s own credit rating and guarantee of bank deposits will lose credibility.


[top]

Share

Fed to lend to CBs in unlimited quantities (day 2)

Posted on by


[Skip to the end]

I’m keeping an eye on crude prices rising a lot more than the USD is falling; so, I suspect the great Mike Masters inventory liquidation has run its course.

Inventories are at record or near record lows.

If there has been net demand destruction, it hasn’t yet showed up in OPEC or Saudi production numbers.

The Saudis only pump on demand, at their price, so as swing producer it’s their production that should fall, not anyone else’s.

However, there can be 90 day type lags; so, October Saudi production could be down but not be reported until early November.

___________________________________________________________________________________________________________________

This latest swap line expansion should be a target of Obama and McCain, but neither are touching it.

It’s a financial blunder, potentially of epic magnitudes.

It’s also an oversight issue of epic magnitudes that could dwarf the subprime issue at the first ECB USD auction tomorrow.

The $620 billion swap lines currently in place could swell to well over a trillion USDs.

It will reduce eurobanks cost of USD funds, bring down LIBOR, and normalize bank liquidity.

And the reduction of bank credit risk is bringing in credit spreads which makes room for equities to appreciate as well.

But that’s an empty victory that changes the lack of aggregate demand very little, if any.

And it adds a new element of systemic risk.

Unrestricted/’currency secured’ international USD lending has been tried before in the emerging markets.

Yes, this type of initial lending reduces financial stress, but then it must be sustained and increased to avoid a subsequent collapse, which then becomes inevitable.

Remember Mexico and the rest of Latin America?

It took a growing level of external USD debt to hold it together, until the number got too large and the controls impossible. And then it all fell apart.

All of these ‘top down’ measures that carry the hopes and anticipations of markets should continue to be let downs as no one addresses demand.

This happened in Japan after the banks were recapitalized and ‘healthy’ and nothing happened regarding lending.

Obama and McCain have a window to jump on this opening but don’t seem to be. McCain as the watchdog and Obama as the reformer are both letting us down. Again, as they show no insight and instead keep to their canned rhetoric.

Bush and congress missed a historic opportunity to move the US away from ‘materialism’ after 9/11.

I got a call from Congressman Gephart at the time, and I said this is an opening to show a different kind of leadership as people had turned ‘inward,’ with the following type of statement:

A nation is not richer because people sleep in hotels instead of staying at home. A nation is not richer because we eat out rather than have family meals at home. And now that we have become more introspective on life itself, we can continue this enlightened change of course, back to our real core values, and steer our efforts to educating our children and improving our health care service, etc. etc.

But instead, our leadership telling us:

“Get out of Church and get into the shopping malls!” in order to ‘save the economy’, etc. etc. Gephart didn’t do it. And we went back to the malls.

This go round was also an opportunity to make a fundamental change away from a lending based model to a more cash based model which seems to me has proven more stable over time and a lot more beneficial to human peace of mind.

We could have let most of our lending institutions go by the wayside and kept the banks that would be allowed to make more conservative home loans, installment loans, checking and savings accounts, and not much else. And the housing agencies operating a bit like the old savings and loan’s used to do, but this time with sustainable, matched treasury funding.

And rather than relying on lending for aggregate demand, which is inherently unstable, we could have supported aggregate demand with a fiscal package to provide sufficient income to buy our output and sustain growth and employment.

But instead we are first ‘fixing’ the lending institutional structure, without addressing aggregate demand.

It’s unlikely that costly (in terms of lost output and employment) credit bubbles will be reduced by first supporting the lending institutions and then supporting demand.


[top]

Share

2008-10-14 USER

Posted on by


[Skip to the end]

ICSC UBS Store Sales YoY (Oct 7)

Survey n/a
Actual 1.30%
Prior 1.10%
Revised n/a

 
Up a tad.

[top][end]

ICSC UBS Store Sales WoW (Oct 7)

Survey n/a
Actual 0.10%
Prior -0.20%
Revised n/a

 
Up a tad.

[top][end]

Redbook Store Sales Weekly YoY (Oct 14)

Survey n/a
Actual .50%
Prior .80%
Revised n/a

 
Down a tad.

[top][end]

Redbook Store Sales MoM (Oct 14)

Survey n/a
Actual -1.20%
Prior -1.40%
Revised n/a

 
A tiny improvement.

Retails sales weak but not in collapse.

Lower fuel prices hurt gross fuel revenues but help non fuel revenues.

[top][end]

ICSC UBS Redbook Comparison TABLE (Oct 14)


[top]

Share

Re: Fed to lend to CBs in unlimited quantities

Posted on by


[Skip to the end]

(email exchange)

>   
>   On Mon, Oct 13, 2008 at 3:00 PM, Craig wrote:
>   
>   Since nobody understand the local currency / foreign currency distinction and
>   since these obligations are part of the normal financial commerce of these
>   countries, is it possible that these loans will allow the markets to normalize,
>   

Yes.

>   
>   Allow the various governmental bodies to remove the guarantees/lending and
>   never realize this risk existed?
>   

Probably not.

>   
>   Everybody was perfectly happy with these private sector risks before the
>   credit markets seized up. Other than the sudden realization of everything
>   you’ve pointed out, what factors will put this over the edge?
>   
>   All this boils down to this question: Does this necessarily have to end badly?
>   

Looks that way to me.

>   
>   Or can the participants use this as a life rope to deleverage successfully,
>   ending the need for the life rope?
>   

I think the incentives are now in place for massive fraud.

Eurozone banks will find it hard to resist the demand for USD loans to their ‘friends’ in finance and industry, that will be based on inflated appraisals, inflated income statements, etc.

Just like the subprime issue was here.

It’s open season and my guess is the Fed is about to be in shock at the size of the first auction.


[top]

Share

2008-10-13 CREDIT

Posted on by


[Skip to the end]

 
Breaking out to new wides, as equities test new lows.

As before, equities are unlikely to rally substantially without the rest of the credit products tightening up.

It’s all the same thing.

IG On-the-run Spreads (Oct 13)

[top][end]

IG6 Spreads (Oct 13)

[top][end]

IG7 Spreads (Oct 13)

[top][end]

IG8 Spreads (Oct 13)

[top][end]

IG9 Spreads (Oct 13)


[top]

Share

Fed to lend to CBs in unlimited quantities unsecured (Update2)

Posted on by


[Skip to the end]

Functionally, the Fed seems to have agreed to lend USD to the ECB in unlimited quantities unsecured and non-recourse.

This defies comprehension.

It’s potentially functionally a fiscal transfer.

Interesting they have the authority to do that.

They wouldn’t even do it for the US banks where the Fed demands collateral for loans.

It opens the door to widespread fraud and corruption as the ECB can now lend USD without supervision or regulation and in any quantity.

Somehow this got under Congress’ radar screen.

Watch for the size of the first USD auction.

The ECB and other CBs are going to set a rate and fill all requests at that rate.

Could be over $1 trillion?

Should bring USD LIBOR down to near the Fed Funds rate.

Helps the euro vs the USD at first.

However, the primary way they pay the Fed back is for someone down the line to sell euros and buy USD.

USD debt is external debt for foreign CB’s, so they are in much the same position the emerging market nations used to be in when they were choked with USD debt.

Still trying to comprehend all the ramifications, but they are very large.

This also means no government should default in the eurozone due to bank funding issues.

As long as the Fed lends unsecured and in unlimited quantities to the ECB and they do the same with their banks, the banks will be able to continue operating regardless of how technically insolvent they may be. It’s only when the funding is cut off or regulators step in that the problems surface.

It’s like the Fed is at risk of backing an international ponzi scheme again, watch for the size of the auctions.

They could snowball into the trillions, and be very difficult to shut down.

Which would also mean accelerating inflation.

Fed Releases Flood of Dollars, Market Rates Fall (Update2)

by John Fraher and Simon Kennedy

Oct. 13 (Bloomberg) The Federal Reserve led an unprecedented push by central banks to flood the financial system with dollars, backing up government efforts to restore confidence and helping to drive down money-market rates.

The ECB, the Bank of England and the Swiss central bank will auction unlimited dollar funds with maturities of seven days, 28 days and 84 days at a fixed interest rate, the Washington-based Fed said today. All of the previous dollar swap arrangements between the Fed and other central banks were capped.


[top]

Share

Fed to lend in unlimited quantites to foreign CBs??? (Update1)

Posted on by


[Skip to the end]

This is hard to believe. Those CBs don’t have unlimited USD.

So, if true, they will be borrowing them from the Fed via an extension of Fed swap lines.

The FOMC has approved lines of $620 billion as last reported.

This is functionally unsecured lending to these CBs.

Repayment can only come from selling their own currencies for the needed USDs.

(or by somehow net exporting to the US or selling assets to the US which are hard to imagine.)

Somehow, this high risk, unsecured, ‘back door’ lending has remained under all radar screens.

And, if true, we will soon see the total USD funding need in the Eurozone.

Fed Says ECB, Others to Offer Unlimited Dollar Funds

by John Fraher and Simone Meier

Oct. 13 (Bloomberg) The U.S. Federal Reserve led an unprecedented push by central banks to flood financial markets with dollars, backing up government efforts to restore confidence in the banking system.

The ECB, the Bank of England and the Swiss central bank will offer unlimited dollar funds in auctions with maturities of seven days, 28 days and 84 days at a fixed interest rate, the Washington-based Fed said today. The Bank of Japan may introduce “similar measures.”


[top]

Share

Crude oil demand

Posted on by


[Skip to the end]

World demand still projected to increase.

Crude Oil Rises From 13-Month Low on European Bank Rescue Plan

by Gavin Evans

The International Energy Agency, an adviser to 28 nations, on Oct. 10 cut its forecast for global oil demand for 2008 to 0.5 percent, the lowest since 1993. Demand next year will rise by 700,000 barrels a day to 87.2 million, 440,000 barrels fewer than the Paris-based agency projected a month earlier.


[top]

Share

European leaders vow Bank guarantees, bid to stop financial rot

Posted on by


[Skip to the end]

Hopefully this will buy some time to hope for a general recovery of output and employment that contains the national deficits.

This plan is also coordinated but still relies on the national government’s balance sheets.

European Leaders Vow Bank Guarantees, Bid to Stop Financial Rot

By James G. Neuger

Oct. 12 (Bloomberg) — European leaders agreed to guarantee bank borrowing and use government money to prevent big lenders from going under, trying to stop the financial hemorrhage and stave off a recession.

At a summit chaired by French President Nicolas Sarkozy, leaders of the 15 countries using the euro offered their most detailed battle plan yet for bandaging the crippled credit markets and halting panic among investors.

The key measures announced today are: a pledge to guarantee new bank debt issuance until the end of 2009; permission for governments to shore up banks by buying preferred shares; and a
commitment to recapitalize any “systemically” critical banks in distress.


All good, but depends on national governments for funding.

France, Germany, Italy and other countries will announce national measures tomorrow, Sarkozy said.

A communiqué gave no indication of how much governments are willing to spend or the size of bank assets deemed at risk,

Or how much the national governments are able to spend before markets stop funding them.

leaving unclear the ultimate cost to the taxpayer.

Also, these are not fiscal measures that directly add to demand.

Nor do they address the need to fund in USD which the eurozone nations don’t have.


[top]

Share

Macro update

Posted on by


[Skip to the end]

Here’s my take on the events of the last year:

Paulson/Bush/Bernanke pressed a ‘weak dollar’ policy to use exports to sustain GDP, rather than a fiscal package to support domestic demand.

This kept the US muddling through but took demand from the rest of world.

The rest of world had become ‘leveraged’ to their exports to the US.

As US imports fell and US exports accelerated, the rest of world economies slowed and support was removed for their credit structures.

No government moved to support domestic demand until the modest US fiscal package of a few months ago. It was too little too late.

None of the credit based economies have the institutional structure to sustain growth and employment with soft asset/collateral prices.

No private sector loans are ‘safe’ when collateral values and income are falling.

The lesson of Japan is that with a general deflation of collateral values it took a federal deficit of at least 8% of GDP just to stay out of recession.

Not sure what it will take here.

The payroll tax holiday would be a good start and probably sufficient to reverse the shortfall of demand.

The US, UK, Japan, etc. will survive a slowdown due to their ‘automatic stabilizers’ that will rapidly increase deficits until they are sufficiently large to turn things around.

The eurozone doesn’t have the institutional structure that will allow this process to work as it does in the other nations with non-convertible currencies.

The eurozone can only hope the rest of world recovers quickly and supports eurozone exports.

Without a US fiscal package US domestic demand will remain weak until the deficit gets large enough via falling tax revenue and rising transfer payments.

Without foreign CB buying of USD, US imports will not increase enough to support rest of world demand.

All this means a decisive US fiscal response, such as the payroll tax holiday, will support:

  • Both US and rest of world aggregate demand.
  • Support the financial sectors from the bottom up.
  • Increase US real terms of trade.

(Not to forget the need for an energy package to keep higher crude prices from hurting our real terms of trade and reducing our standard of living.)


[top]

Share