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Category Archives: Bonds
Goldman Sachs trying to broker Greek bonds to China
I went to high school with Chris Powell where he was a good friend of mine, then lost touch.
We’ve had a few emails discussing GATA. Seems their beef is that the Fed is conspiring to keep the price of gold down, which wrongly hurts the GATA supporters.
Didn’t make a lot of sense to me, but whatever.
Regarding China and the euro-
Note China already owns some Greek bonds, highlighted below?
I was discussing this a while back when China was ‘diversifying reserves’ in that one of the problems with the buying the euro is you have to take national govt credit risk, as there is nothing equivalent to the ‘federal’ securities of the other nations of the world with non convertible currencies where the issuer of the currency is your counter party.
Also, when the likes of China stops buying, say, the $US or the yen, it’s not a credit event for the US like it is when they stop buying the euro, where the national govt’s solvency is a function of their ability to sell their securities.
So the lack of euro buying by sovereigns who were willing to take national govt credit risk puts the entire eurozone at risk of a liquidity crisis beginning with its ‘weakest link.’ Hence the Greek ‘road trips’ to China, which do make sense, in contrast to the Obama/Clinton/Geithner road trips to China which reinforce the notion that they don’t understand the monetary system.
I’ve also passed along the idea that if Greek bonds were to have default provisions that allowed them to be used to pay Greek taxes in the event of default it should lower their interest rates. Don’t know if that got anywhere- no way for me to check.
Goldman Sachs trying to broker Greek bonds to China
Athens Invites Beijing to Buy Bonds
By Kerin Hope and Jamil Anderlini
Link
Greece is wooing China to buy up to E25 billion of government bonds, a move that underlines Beijing’s growing financial power, as Athens struggles to fund soaring public debt.
Goldman Sachs, the US investment bank, has been promoting a Greek bond sale to Beijing and the State Administration of Foreign Exchange (SAFE), which manages China’s $2,400 billion foreign exchange reserves, said people familiar with the issue.
Gary Cohn, Goldman Sachs chief operating officer, has made two trips to Athens — last November and this month — to meet George Papandreou, prime minister, and senior officials.
Beijing has not agreed to such a purchase. Meanwhile, Athens has rejected a suggestion that a Chinese bank should acquire a strategic stake in National Bank of Greece, the country’s flagship commercial lender, according to officials contacted by the Financial Times.
But a more modest deal of about E5 billion-E10 billion ($7 billion-$14 billion) appeared possible after Mr Cohn’s second trip to Athens, officials said on Tuesday.
George Papaconstantinou, finance minister, told the FT he would visit China on a road show next month, but “no target is set” for a debt placement.
China’s foreign exchange reserves grew $130 billion in the last quarter of 2009 alone. But people close to Safe said China already held a “significant amount” of Greek debt and was wary of adding to that.
A senior Greek finance ministry official said Athens would welcome Chinese buyers of its bonds. The official declined to specify an amount, though a figure of E20 billion-E25 billion was raised in talks with Goldman Sachs.
A E5 billion syndicated loan issue by Greece this week attracted bids worth more than E20 billion, but Greece continues to face pressure in financial markets.
Goldman Sachs mooted the sale of equity in NBG to Bank of China, the country’s third-largest commercial lender by assets, and made a similar proposal to China Investment Corp., China’s sovereign wealth fund, according to officials.
Chinese officials said CIC was not interested and that regulators would not let BoC make such a risky investment. Goldman Sachs and CIC declined to comment. A Bank of China spokesman said: “I haven’t heard anything about it.”
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Japan
Karim writes:
There is a piece typifying the logic behind the buying of high strike payers in Japan (Japanese govt debt ‘Ponzi Scheme’).
Also heard GS put a similar piece out today but have not seen.
Makes no sense but seems to be gathering steam.
Right, the sustainability issue with floating FX is the issue of the sustainability of low inflation.
The ‘risk’ is that ‘excessive’ deficit spending adds inflationary demand, weakens the currency, etc. however the article seems to reject that argument as it suggests quantitative easing will continue due to weakness of demand, etc.
Nor are the ‘sustainability remedies’ applicable to floating FX. Any ‘stress’ is taken out by the exchange rate, and the way things generally work ‘excessive’ deficits increase nominal gdp/inflation and tend to stabilize debt/gdp ratios when that point of ‘excessiveness’ is reached.
As always, it’s about inflation, not solvency.
Govt spending is in no case inherently revenue constrained.
Any such constraints are necessarily self imposed.
This is all not to say this type of rhetoric can not trigger portfolio shifts and trading plays that can substantially move markets while they last.
In fact, that’s often what bubbles are.
Decline in Government Debt Sustainability
An extended period of heavy fiscal deficits will reduce the sustainability of government debt, which is already in the danger zone. The general-government debt was equivalent to 196% of GDP at the end of FY2008 (156% for long-term debt) and we project a rise to 222% (181%) for end-FY2010. This escalation is in part the consequence of low nominal GDP growth — we forecast an average -1.4% for 2009-10—and the average JGB yield is almost continuously above the nominal growth rate. The sustainability remedies are a deep cut in the debt ratio through sales and liquidation of government assets, combined with a demographic boost for the potential growth rate from measures to boost the birthrate and encourage immigration.
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latest Bernanke remarks
Like depository institutions in the United States, foreign banks with large dollar-funding needs have also experienced powerful liquidity pressures over the course of the crisis. This unmet demand from foreign institutions for dollars was spilling over into U.S. funding markets, including the federal funds market, leading to increased volatility and liquidity concerns. As part of its program to stabilize short-term dollar-funding markets, the Federal Reserve worked with foreign central banks–14 in all–to establish what are known as reciprocal currency arrangements, or liquidity swap lines. In exchange for foreign currency, the Federal Reserve provides dollars to foreign central banks that they, in turn, lend to financial institutions in their jurisdictions. This lending by foreign central banks has been helpful in reducing spreads and volatility in a number of dollar-funding markets and in other closely related markets, like the foreign exchange swap market. Once again, the Federal Reserve’s credit risk is minimal, as the foreign central bank is the Federal Reserve’s counterparty and is responsible for repayment, rather than the institutions that ultimately receive the funds; in addition, as I noted, the Federal Reserve receives foreign currency from its central bank partner of equal value to the dollars swapped.
Looks like they still fail to recognize these dollar loans are functionally unsecured.
The principal goals of our recent security purchases are to lower the cost and improve the availability of credit for households and businesses. As best we can tell, the programs appear to be having their intended effect. Most notably, 30-year fixed mortgage rates, which responded very little to our cuts in the target federal funds rate, have declined about 1-1/2 percentage points since we first announced MBS purchases in November, helping to support the housing market.
Correct on this count. Treasury purchases are about interest rates and not quantity.
Currency and bank reserves together are known as the monetary base; as reserves have grown, therefore, the monetary base has grown as well. However, because banks are reluctant to lend in current economic and financial circumstances, growth in broader measures of money has not picked up by anything remotely like the growth in the base. For example, M2, which comprises currency, checking accounts, savings deposits, small time deposits, and retail money fund shares, is estimated to have been roughly flat over the past six months.
Correct here as well, where he seems to recognize the ‘base’ is not causal. Lending is demand determined within a bank’s lending criteria.
The idea behind quantitative easing is to provide banks with substantial excess liquidity in the hope that they will choose to use some part of that liquidity to make loans or buy other assets.
Here, however, there is an implied direction of causation from excess reserves to lending. This is a very different presumed transmission mechanism than the interest rate channel previously described.
Such purchases should in principle both raise asset prices and increase the growth of broad measures of money, which may in turn induce households and businesses to buy nonmoney assets or to spend more on goods and services.
Raising asset prices is another way to say lowering interest rates, which is the same interest rate channel previously described.
In a quantitative-easing regime, the quantity of central bank liabilities (or the quantity of bank reserves, which should vary closely with total liabilities) is sufficient to describe the degree of policy accommodation.
The degree of policy accommodation is the extent to which interest rates are lower than without that accommodation, if one is referring to the interest rate channel, which at least does exist.
The quantity of central bank liabilities would measure the effect of the additional quantity of reserves, which has no transmission mechanism per se to lending or anything else, apart from interest rates.
However, the chairman is only defining his terms, and he’s free to define ‘accommodation’ as he does, though I would suggest that definition is purely academic and of no further analytic purpose.
Although the Federal Reserve’s approach also entails substantial increases in bank liquidity, it is motivated less by the desire to increase the liabilities of the Federal Reserve than by the need to address dysfunction in specific credit markets through the types of programs I have discussed. For lack of a better term, I have called this approach “credit easing.”11 In a credit-easing regime, policies are tied more closely to the asset side of the balance sheet than the liability side, and the effectiveness of policy support is measured by indicators of market functioning, such as interest rate spreads, volatility, and market liquidity. In particular, the Federal Reserve has not attempted to achieve a smooth growth path for the size of its balance sheet, a common feature of the quantitative-easing approach.
Here he goes back to his interest rate transmission mechanism which does exist. But the implication is still there that the quantity of reserves does matter to some unspecified degree.
As we just saw in slide 6, banks currently hold large amounts of excess reserves at the Federal Reserve. As the economy recovers, banks could find it profitable to be more aggressive in lending out their reserves, which in turn would produce faster growth in broader money and credit measures and, ultimately, lead to inflation pressures.
When he turns to the ‘exit strategy’ it all goes bad again. Banks don’t ‘lend out their reserves.’ in fact, lending does not diminish the total reserves in the banking system. Loans ‘create’ their own deposits as a matter of accounting. If the banks made $2 trillion in loans tomorrow total reserves would remain at $2 trillion, until the Fed acted to reduce its portfolio.
Yes, lending can ‘ultimately lead to inflation pressures’ but reserve positions are not constraints on bank lending. Lending is restricted by capital and by lending standards.
Under a gold standard loans are constrained by reserves. Perhaps that notion has been somehow carried over to this analysis of our non convertible currency regime?
As such, when the time comes to tighten monetary policy, we must either substantially reduce excess reserve balances or, if they remain, neutralize their potential effects on broader measures of money and credit and thus on aggregate demand and inflation.
Again, altering reserve balances will not alter lending practices. The Fed’s tool is interest rates, not reserve quantities.
Although, in principle, the ability to pay interest on reserves should be sufficient to allow the Federal Reserve to raise interest rates and control money growth, this approach is likely to be more effective if combined with steps to reduce excess reserves. I will mention three options for achieving such an outcome.
More of the same confusion. Yes, paying interest will be sufficient to raise rates. However a different concept is introduced, raising interest rates to control ‘money growth’ rather than, as previously mentioned, raising rates to attempt to reduce aggregate demand. Last I read and observed the Fed has long abandoned the notion of attempting control ‘money growth’ as a means of controlling aggregate demand. The ‘modern’ approach to monetarism that prescribes interest rate manipulation to control aggregate demand does not presume the transmission mechanism works through ‘money supply’ growth, but instead through other channels.
First, the Federal Reserve could drain bank reserves and reduce the excess liquidity at other institutions by arranging large-scale reverse repurchase agreements (reverse repos) with financial market participants, including banks, the GSEs, and other institutions.
Reverse repos are functionally nothing more than another way to pay interest on reserves.
Second, using the authority the Congress gave us to pay interest on banks’ balances at the Federal Reserve, we can offer term deposits to banks, roughly analogous to the certificates of deposit that banks offer to their customers. Bank funds held in term deposits at the Federal Reserve would not be available to be supplied to the federal funds market.
This is also just another way to pay interest on reserves, this time for a term longer than one day.
Third, the Federal Reserve could reduce reserves by selling a portion of its holdings of long-term securities in the open market.
Back to the confusion. The purpose of the purchase of long term securities was to lower long term rates and thereby help the real economy. Selling those securities does the opposite- it increases long term rates, and will presumably slow things down in the real economy.
However, below, he seems to miss that point, and returns to assigning significance to ‘money supply’ measures.
Each of these policy options would help to raise short-term interest rates and limit the growth of broad measures of money and credit, thereby tightening monetary policy.
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Assessing the Fed under Chairman Bernanke
“Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”
Keynes, Chapter 12, The General Theory of Employment, Interest, and Money
The Fed has failed, but failed conventionally, and is therefore being praised for what it has done.
The Fed has a stated goal of “maximum employment, stable prices, and moderate long term interest rates” (Both the Federal Act 1913 and as amended in 1977).
It has not sustained full employment. And up until the recent collapse of aggregate demand, the Fed assumed it had the tools to sustain the demand necessary for full employment. In fact, longer term Federal Reserve economic forecasts have always assumed unemployment would be low and inflation low two years in the future, as those forecasts also assumed ‘appropriate monetary policy’ would be applied.
The Fed has applied all the conventional tools, including aggressive interest rate cuts, aggressive lending to its member banks, and extended aggressive lending to other financial markets. Only after these actions failed to show the desired recovery in aggregate demand did the Fed continue with ‘uncoventional’ but well known monetary policies. These included expanding the securities member banks could use for collateral, expanding its portfolio by purchasing securities in the marketplace, and lending unsecured to foreign central banks through its swap arrangements.
While these measures, and a few others, largely restored ‘market functioning’ early in 2009, unemployment has continued to increase, while inflation continues to press on the low end of the Fed’s tolerance range. Indeed, with rates at 0% and their portfolio seemingly too large for comfort, they consider the risks of deflation much more severe than the risks of an inflation that they have to date been unable to achieve.
The Fed has been applauded for staving off what might have been a depression by taking these aggressive conventional actions, and for their further aggressiveness in then going beyond that to do everything they could to reverse a dangerously widening output gap.
The alternative was to succeed unconventionally with the proposals I have been putting forth for well over a year. These include:
1. The Fed should have always been lending to its member banks in the fed funds market (unsecured interbank lending) in unlimited quantities at its target fed funds rate. This is unconventional in the US, but not in many other nations that have ‘collars’ where the Central Bank simply announces a rate at which it will borrow, and a slightly higher rate at which it will lend.
Instead of lending unsecured, the Fed demands collateral from its member banks. When the interbank markets ceased to function, the Fed only gradually began to expand the collateral it would accept from its banks. Eventually the list of collateral expanded sufficiently so that Fed lending was, functionally, roughly similar to where it would have been if it were lending unsecured, and market functioning returned.
What the Fed and the administration failed to appreciate was that demanding collateral from loans to member banks was redundant. The FDIC was already examining banks continuously to make sure all of their assets were deemed ‘legal’ and ‘appropriate’ and properly risk weighted and well capitalized. It is also obligated to take over any bank not in compliance. The FDIC must do this because it insures the bank deposits that potentially fund the entire banking system. Lending to member banks by the Fed in no way changes the asset structure of the banks, and so in no way increases the risk to government as a whole. If anything, unsecured lending by the Fed alleviates risk, as unsecured Fed lending eliminates the possibility of a liquidity crisis.
2. The Fed has assumed and continued to assume lower interest rates add to aggregate demand. There are, however, reasons to believe this is currently not the case.
First, in a 2004 Fed paper by Bernanke, Sacks, and Reinhart, the authors state that lower interest rates reduce income to the non government sectors through what they call the ‘fiscal channel.’ As the Fed cuts rates, the Treasury pays less interest, thereby reducing the income and savings of financial assets of the non government sectors. They add that a tax cut or Federal spending increase can offset this effect. Yet it was never spelled out to Congress that a fiscal adjustment was potentially in order to offset this loss of aggregate demand from interest rate cuts.
Second, while lowering the fed funds rate immediately cut interest rates for savers, it was also clear rates for borrowers were coming down far less, if at all. And, in many cases, borrowing rates rose due to credit issues. This resulted in expanded net interest margins for banks, which are now approaching an unheard of 5%. Funds taken away from savers due to lower interest rates reduces aggregate demand, borrowers aren’t gaining and may be losing as well, and the additional interest earned by lenders is going to restore lost capital and is not contributing to aggregate demand. So this shift of income from savers to banks (leveraged lenders) is reducing aggregate demand as it reduces personal income and shifts those funds to banks who don’t spend any of it.
3. The Fed is perpetuating the myth that its monetary policy will work with a lag to support aggregate demand, when it has no specific channels it can point to, or any empirical evidence that this is the case. This is particularly true of what’s called ‘quantitative easing.’ Recent surveys show market participants and politicians believe the Fed is engaged in ‘money printing,’ and they expect the size of the Fed’s portfolio and the resulting excess reserve positions of the banks to somehow, with an unknown lag, translate into a dramatic ‘monetary expansion’ and inflation. Therefore, during this severe recession where unemployment has continued to be far higher than desired, market participants and politicians are focused instead on what the Fed’s ‘exit strategy’ might be. The the fear of that presumed event has clearly taken precedence over the current economic and social disaster. A second ‘fiscal stimulus’ is not even a consideration, unless the economy gets substantially worse. Published papers from the NY Fed, however, clearly show how ‘quantitative easing’ should not be expected to have any effect on inflation. The reports state that in no case is the banking system reserve constrained when lending, so the quantity of reserves has no effect on lending or the economy.
4. The Fed is perpetuating the myth that the Federal Government has ‘run out of money,’ to use the words of President Obama. In May, testifying before Congress, when asked where the money the Fed gives the banks comes from, Chairman Bernanke gave the correct answer- the banks have accounts at the Fed much like the rest of us have bank accounts, and the Fed gives them money simply by changing numbers in their bank accounts. What the Chairman explained was there is no such thing as the government ‘running out of money.’ But the government’s personal banker, the Federal Reserve, as decided not publicly correct the misunderstanding that the government is running out of money, and thereby reduced the likelihood of a fiscal response to end the current recession.
There are also additional measures the Fed should immediately enact, such banning member banks from using LIBOR in any of their contracts. LIBOR is controlled by a foreign entity and it is counter productive to allow that to continue. In fact, it was the use of LIBOR that prompted the Fed to advance the unlimited dollar swap lines to the world’s foreign central banks- a highly risky and questionable maneuver- and there is no reason US banks can’t index their rates to the fed funds rate which is under Fed control.
There is also no reason I can determine, when the criteria is public purpose, to let banks transact in any secondary markets. As a point of logic, all legal bank assets can be held in portfolio to maturity in the normal course of business, and all funding, both short term and long term can be obtained through insured deposits, supplemented by loans from the Fed on an as needed basis. This would greatly simply the banking model, and go a long way to ease regulatory burdens. Excessive regulatory needs are a major reason for regulatory failures. Banking can be easily restructured in many ways for more compliance with less regulation.
There are more, but I believe the point has been made. I conclude by giving the Fed and Chairman Bernanke a grade of A for quickly and aggressively applying conventional actions such as interest rate cuts, numerous programs for accepting additional collateral, enacting swap lines to offset the negative effects of LIBOR dependent domestic interest rates, and creative support of secondary markets. I give them a C- for failure to educate the markets, politicians, and the media on monetary operations. And I give them an F for failure to recognize the currently unconventional actions they could have taken to avoid the liquidity crisis, and for failure inform Congress as to the necessity of sustaining aggregate demand through fiscal adjustments.
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Guaranty Bank: OTS Closes the Barn Door
Interesting they are selling the assets to a foreign bank, presumably at high rates of return. Just one more thing that pushes exports and reduces our real terms of trade and standard of living.
Also, by addressing the banking issue from the ‘top down’ by funding the banks and supporting net interest margins, the US govt. has neglected the borrowers who are still not earning sufficient income working (or collecting unemployment) to make their payments.
The answer was my payroll tax holiday, per capita revenue sharing, and $8/hour job for anyone willing and able to work. That would still immediately reverse things and prevent continuing deterioration, but the losses are gone forever.
It has been widely reported that the assets of Guaranty Bank (Texas) will be seized Friday by the FDIC and sold to Banco Bilbao Vizcaya Argentaria SA of Spain.
Meanwhile the OTS issued a Prompt Corrective Action (PCA) to Guaranty yesterday. Maybe they didn’t get the memo …
Also, from the WSJ: In New Phase of Crisis, Securities Sink Banks
Guaranty owns roughly $3.5 billion of securities backed by adjustable-rate mortgages, with two-thirds of the loans in foreclosure-wracked California, Florida and Arizona, according to the company’s latest report. Delinquency rates on the holdings have soared as high as 40%, forcing write-downs last month that consumed all of the bank’s capital.
Guaranty is one of thousands of banks that invested in such securities …
It’s not just their own bad loans (usually C&D and CRE) taking down the local and regional banks, but also bad investments in securities based on other bank’s bad loans.
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Geithner Pledges Smaller Deficit as China Talks Start
Geithner Pledges Smaller Deficit as China Talks Start
By Rebecca Christie and Rob Delaney
July 27 (Bloomberg) — Treasury Secretary Timothy Geithner pledged the U.S. will shrink its budget deficit over the next four years and boost national savings,
Ah, ‘national savings,’ that gold standard measure that’s inapplicable with our non convertible dollar and floating fx policy.
Today it’s nothing more than another term for our trade balance.
‘National savings’ falls when the federal deficit rises and those funds thus created are held by non residents.
On a gold standard (or other fixed fx regime) that represented a gold outflow, as non residents were holding US currency that was convertible into gold on demand. And the gold supply was the national savings.
Anyone who uses that term in the context of non convertible currency is either ignorant or deliberately misleading.
and he called on China to maintain efforts to ease the impact of the global recession. “We are committed to taking measures to maintaining greater personal saving and to reducing the federal deficit to a sustainable level by 2013,†Geithner said in opening remarks for Strategic and Economic Dialogue meetings with Chinese officials in Washington.
Since total non government savings of financial assets equals federal deficit spending to the penny (it’s an accounting identity) cutting the deficit and increasing domestic savings can only be done by simultaneously reducing our trade deficit by exactly that much. That would likely mean importing a lot less from china.
So what his words are telling them is that the US is committed to buying less from them. That should give them a lot of comfort?
Geithner’s comments reinforced his efforts to reassure China, the largest foreign holder of American government debt, that this year’s record U.S. budget gap won’t pose a long-term danger. The shortfall is on course to reach $1.8 trillion in the year through September.
Geithner and Secretary of State Hillary Clinton are hosting Vice Premier Wang Qishan and Dai Bingguo, a state councilor, at the meetings today and tomorrow, the first such gathering since President Barack Obama took office.
Obama called for the two nations to deepen cooperation and work together to help the global economy. “As Americans save more and Chinese are able to spend more, we can put growth on a more sustainable foundation,†Obama said in his remarks. “Just as China has benefited from substantial investment and profitable exports, China can also be an enormous market for American goods.â€
Wonderful, we work and produce goods and services for them to consume. That is called diminished real terms of trade and a reduced standard of living for the us.
Outside Investment
U.S. officials said last week they plan to raise concern
about China’s resistance to foreign investment at the talks,
China’s growing dollar reserves result mainly from foreign investment, where foreigners buy yuan with dollars so they spend the yuan in China on real investment (and maybe a bit of speculation).
while Chinese officials this year have highlighted their own worries about the value of their American investments.
Yes, and the play us for complete fools.
Geithner fielded a bevy of questions about the deficit during his June visit to Beijing. China’s holdings of U.S. Treasuries reached $801.5 billion in May, recording about a 100 percent increase on the level at the beginning of 2007, according to U.S. government figures.
“Recognizing that close cooperation between the United States and China is critical to the health of the global economy, we need to design a new framework to ensure sustainable and balanced global growth.â€
No hint of what that ‘framework’ might actually be.
After seeing the ‘framework’ they’ve come up with for the US financial structure the odds of anything functionally constructive seem slim.
The Obama administration will take steps to put the U.S. on course for economic health, he said.
Like reducing the federal budget deficit when current steps have fallen far short of restoring aggregate demand?
Obama’s Goals
“The president also is committed to making the investments in clean energy, education and health care that will make our nation more productive and prosperous,†Geithner said. “Together these investments will ensure robust U.S. growth and a sustainable current account balance.â€
Non look to add to aggregate demand in any meaningful way, especially with the associated tax increases.
And investement per se reduces standards of living. It’s only when that investment results in increased productivity for consumer goods and services is there an increase in our standard of living.
Geithner also repeated his call for China, which has posted record trade surpluses in recent years, to increase demand at home.
“China’s success in shifting the structure of the economy towards domestic-led growth, including a greater role for spending by China’s citizens, will be a huge contribution to more rapid, balanced, and sustained global growth,†Geithner said.
Just what we need, a billion non residents increasing their real consumption and competing with us for real resources.
In the talks today and tomorrow in Washington, U.S. officials said they plan to tell the Chinese the American rebound from a recession won’t be led as much by consumers as past recoveries.
That means our standard of living won’t be recovering even though GDP is recovering.
The American side also will urge China to rely more on household spending and less on exports for growth, an official told reporters in a July 23 press briefing in Washington.
Clearly the obama administration does not understand the monetary system and is working against actual public purpose.
The U.S. is concerned that there’s been a hardening of attitudes regarding China’s treatment of foreign investment, the official also said last week. China’s exchange-rate policy is another topic for discussion, the official said.
Total confusion on that front as well.
We push for a weak dollar/strong yuan policy so prices for China’s products at our department stores rise to the point we can’t afford to buy them.
Then we try to get them not to sell their dollar reserves because it might make the dollar go down.
From Mauer:
Hey, why don’t we all move to Latvia, where they do all of the stuff that Geithner advocates:
Latvia, which pegs its currency to the euro, now has a “strong”, stable currency. Good for them. They are sustaining this strong currency by crushing demand. Exports are down 28pc, but imports are down even more. The result of this Stone Age policy is economic contraction of 18pc this year, and 4pc in 2010.
But hey, you’ve got a “healthy” currency and a country which is pursuing a “sensible” fiscal policy with lots of belt tightening. And supposedly “building up national savings” as a consequence of these wonderful policies.
Where do we find these people?
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PIMCO’S Gross proposes tax increase
Raise taxes with unemployment rising due to a shortage in aggregate demand?
Just in case you thought the great marketer understood the monetary system:
Pimco’s Gross: Maybe Obama Should RAISE Taxes
By: JeeYeon Park
June 3 (CNBC) — Inflation is likely three to five years down the road, and investors should stay relatively close to the front end of the yield curve where the bond prices are protected by the Fed position of low Fed funds and interest rates, said Bill Gross, co-CIO and founder of Pimco.
“Further out on the curve, anticipate deterioration in inflation, a deterioration possibility in terms of the dollar, which will produce negative returns for those long-dated securities,†Gross told CNBC.
Gross said the recovery is being driven by a $2 trillion annualized deficit. To take its place in the economy would require at least $1 trillion increase in consumption and investment, which would be quite challenging as baby boomers and consumers become more thrifty.
He also said the Obama administration should cut back on inefficient defense programs — and consider raising taxes.
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Professor John Taylor on the exploding debt
From the good professor who brought us the ‘Taylor Rule’ for Fed funds:
Exploding debt threatens America
by John Taylor
May 26 — Standard and Poor’s decision to downgrade its outlook for British sovereign debt from “stable†to “negative†should be a wake-up call for the US Congress and administration. Let us hope they wake up.
And yet another black mark on the ratings agencies.
Under President Barack Obama’s budget plan, the federal debt is exploding. To be precise, it is rising – and will continue to rise – much faster than gross domestic product, a measure of America’s ability to service it.
Gdp is a measure of our ability to change numbers on our own spread sheet?
The federal debt was equivalent to 41 per cent of GDP at the end of 2008; the Congressional Budget Office projects it will increase to 82 per cent of GDP in 10 years. With no change in policy, it could hit 100 per cent of GDP in just another five years.
Almost as high as Italy and Italy does not even have its own currency.
“A government debt burden of that [100 per cent] level, if sustained, would in Standard & Poor’s view be incompatible with a triple A rating,†as the risk rating agency stated last week.
Now there’s quality support for an academic position…
I believe the risk posed by this debt is systemic and could do more damage to the economy than the recent financial crisis.
‘Believe’? Without even anecdotal support? Is that the best he can do? This is very poor scholarship at best.
To understand the size of the risk,
I think he means the size of the deficit, but is loading the language for effect.
Is that what serious academics do?
take a look at the numbers that Standard and Poor’s considers. The deficit in 2019 is expected by the CBO to be $1,200bn (€859bn, £754bn). Income tax revenues are expected to be about $2,000bn that year, so a permanent 60 per cent across-the-board tax increase would be required to balance the budget. Clearly this will not and should not happen. So how else can debt service payments be brought down as a share of GDP?
This presumes an unspoken imperative to bring them down. Again poor scholarship.
Inflation will do it. But how much? To bring the debt-to-GDP ratio down to the same level as at the end of 2008 would take a doubling of prices. That 100 per cent increase would make nominal GDP twice as high and thus cut the debt-to-GDP ratio in half, back to 41 from 82 per cent. A 100 per cent increase in the price level means about 10 per cent inflation for 10 years. But it would not be that smooth – probably more like the great inflation of the late 1960s and 1970s with boom followed by bust and recession every three or four years, and a successively higher inflation rate after each recession.
Ok. Inflation, if it happens as above, can bring down the debt ratio. How does this tie to his initial concern over solvency implied in his reference to the AAA rating being a risk for our ‘ability to service it?’
And still no reason is presented that 41% is somehow ‘better’ than 82%.
Nor any analysis of aggregate demand, and how the demand adds and demand leakages interact. Just an ungrounded presumption that a lower debt to GDP ratio is somehow superior in some unrevealed sense.
The fact that the Federal Reserve is now buying longer-term Treasuries in an effort to keep Treasury yields low adds credibility to this scary story, because it suggests that the debt will be monetised.
So what does ‘monetised’ mean? I submit it means absolutely nothing with non convertible currency and a floating fx policy.
That the Fed may have a difficult task reducing its own ballooning balance sheet to prevent inflation increases the risks considerably.
And the presumption that the Fed’s balance sheet per se with a non convertible currency and floating exchange rate policy is ludicrous. All central bankers worth any salt know that causation runs from loans to deposits and reserves, and never from reserves to anything.
And 100 per cent inflation would, of course, mean a 100 per cent depreciation of the dollar.
He’s got that math right- if prices remain where they are today in the other currencies and purchasing power parity holds. And he also knows both of those are, for all practical purposes, never the case.
Why has he turned from academic to propagandist? Krugman envy???
Americans would have to pay $2.80 for a euro; the Japanese could buy a dollar for Y50; and gold would be $2,000 per ounce. This is not a forecast, because policy can change;
And it assumes the above, Professor Taylor
rather it is an indication of how much systemic risk the government is now creating.
So currency depreciation is systemic risk?
Why might Washington sleep through this wake-up call? You can already hear the excuses.
“We have an unprecedented financial crisis and we must run unprecedented deficits.†While there is debate about whether a large deficit today provides economic stimulus, there is no economic theory or evidence that shows that deficits in five or 10 years will help to get us out of this recession.
Huh? None??? What’s he been reading other than his own writings and the mainstream tagalongs?
Such thinking is irresponsible. If you believe deficits are good in bad times, then the responsible policy is to try to balance the budget in good times.
Ahah, a logic expert!!! That makes no sense at all.
The CBO projects that the economy will be back to delivering on its potential growth by 2014. A responsible budget would lay out proposals for balancing the budget by then rather than aim for trillion-dollar deficits.
‘Responsible’??? As if there is a morality issue regarding the budget deficit per se???
“But we will cut the deficit in half.†CBO analysts project that the deficit will be the same in 2019 as the administration estimates for 2010, a zero per cent cut.
“We inherited this mess.†The debt was 41 per cent of GDP at the end of 1988, President Ronald Reagan’s last year in office, the same as at the end of 2008, President George W. Bush’s last year in office. If one thinks policies from Reagan to Bush were mistakes does it make any sense to double down on those mistakes, as with the 80 per cent debt-to-GDP level projected when Mr Obama leaves office?
The biggest economic mistake of our life time might have been not immediately reversing the Clinton surpluses when demand fell apart right after 2000. And, worse, spinning those years to convince Americans that the surpluses were responsible for sustaining the good times, when in fact they ended them, as they always do. Bloomberg reported the surplus that ended in 2001 was the longest since 1927-1930. Do those dates ring a bell???
The time for such excuses is over. They paint a picture of a government that is not working, one that creates risks rather than reduces them. Good government should be a nonpartisan issue. I have written that government actions and interventions in the past several years caused, prolonged and worsened the financial crisis.
Lack of a fiscal adjustment last July is what allowed the subsequent collapse
The problem is that policy is getting worse not better. Top government officials, including the heads of the US Treasury, the Fed, the Federal Deposit Insurance Corporation and the Securities and Exchange Commission are calling for the creation of a powerful systemic risk regulator to reign in systemic risk in the private sector. But their government is now the most serious source of systemic risk.
Finally something I agree with. Our biggest risk is that government starts reigning in the deficits or fails to further expand them should the output and employment remain sub trend.
The good news is that it is not too late. There is time to wake up, to make a mid-course correction, to get back on track. Many blame the rating agencies for not telling us about systemic risks in the private sector that lead to this crisis. Let us not ignore them when they try to tell us about the risks in the government sector that will lead to the next one.
The writer, a professor of economics at Stanford and a senior fellow at the Hoover Institution, is the author of ‘Getting Off Track: How Government Actions and Interventions Caused, Prolonged, and Worsened the Financial Crisis’
It’s not too late for a payroll tax holiday, revenue sharing with the states on a per capita basis, and federal funding of an $8 hr job for anyone willing and able to work that includes federal health care, to restore agg demand from the bottom up, restoring output, employment, and ending the financial crisis as credit quality improves.
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2009-01-09 EU News Highlights
Highlights
| Trichet Sees ‘Significant’ Economic Worsening, II Magazine Says |
| European Confidence Drops to Record Low; Unemployment Increases |
| German Exports Drop 10.6% as Recession Hurts Orders |
| German Ministry Seeks $136 Billion Fund to Ease Company Credit |
| German bond sale’s fate signals trouble ahead |
‘Bond failures’ are not all that uncommon in the eurozone and more of a debt management issue at this point.
However a rising deficit due to falling revenues and rising transfer payments as GDP weakens could cause the ability to fund to deteriorate rapidly.
Bank failures that require national government funding don’t help either, and the eurozone seems long overdue for multiple major bank failures.
| German Builders See 2% Drop in Revenue in 2009, HDB Group Says |
| Steinmeier Casts Doubt on German Deficit Limit, Rundschau Says |
| Sarkozy Says France to Provide More Capital to Banks |
| Spain December Jobless Claims Rise as Economy Enters Recession |
| European Two-Year Government Notes Decline, Reversing Gains |
German bond sale’s fate signals trouble ahead
by David Oakley
A German sovereign bond auction failed on Wednesday as investors shunned one of the most liquid and safe assets in the world in a warning for governments seeking to raise record amounts of debt to stimulate slowing economies.
The fate of the first eurozone bond auction of 2009 signals trouble ahead as governments around the world hope to issue an estimated $3,000bn in debt this year, three times more than in 2008.
The 10-year bonds failed to attract enough bids to reach the €6bn the German government wanted. Bids of €5.24bn, a cover of only 87 per cent, amounted to the second worst auction on record in terms of demand.
Such developments were rare before the credit crisis. Before the seven German bond auctions that failed last year, the last German bond auction to fail was in July 2000 after the dotcom crash.
Analysts said the vast amount of supply is deterring investors and a growing number of countries, including those with deep and mature bond markets, such as Germany, the UK and Italy, are struggling to attract buyers.
The Netherlands has seen bond auctions fail, the UK and Italy have been forced to offer investors higher yields to meet their auction targets, while Spain and Belgium have cancelled offerings because of a lack of demand.
The German finance agency admitted that investor appetite for government debt had waned, although insisted the auction was “not a disappointment”.
Meyrick Chapman, a UBS fixed-income strategist, said when a German bond auction failed it “does suggest there may be trouble ahead for other governments wanting to raise money in the debt markets. Before the financial crisis, German bond auctions just did not fail.”
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