U.S. and Eur Data/GDP Downgrades


Karim writes:

U.S. data on the soft side (October)

  • Most notable is core durable goods orders (capex has been gwth leader of late) falling 1.8% and 3mth annual rate slowing to 4% from 7.3%
  • Core shipments (more important for current quarter growth) down 1.1%
  • Personal spending up 0.1%.
  • Personal income up 0.4% (mostly via wages) and savings rate up from 3.3% to 3.5%
  • Headline Price index-0.1% and core unchanged, so reasonable increase in real incomes. Core PCE Index now 1.5% 3mth annualized vs 2% last month

EUR Composite PMI ‘surprises’ to upside in November, rising from 46.5 to 47.2

  • Interesting that manufacturing (more volatile and more of a leading indicator) much weaker than services.
  • Also, German new orders fall 2.6pts to 42.6

Q4 GDP estimates in U.S. being shaved 0.25-0.50% on the data. Current range 2.5-3.25%.
Failure to extend payroll tax cut would have impact almost entirely in Q1 2012 (annual withholding ceilings typically reached early in the year)-about 1% on GDP.

European estimates are about -1.5% annualized for both Q4 and Q1. Germany among the weakest (due to manufacturing) with estimates in the -2.5% area.

PMI data in Europe has had a very good track record signaling ECB policy rate changes. This data pretty much cements another rate cut next month.

Comment From Reader

Neil says:

In 1847 Ignaz Semmelweis showed that the washing of hands in a chlorinated lime solution reduced the incidences of death in surgery.

It conflicted with the established orthodoxy at the time and he was ridiculed for it. It took over 25 years before Surgeons started to wash their hands before Surgery. In the meantime countless unlamented people died at the hands of dirty Surgeons who thought they knew better.

It led rise to a term – the ‘Semmelweis reflex’ – a metaphor for a certain type of human behaviour characterized by reflex-like rejection of new knowledge because it contradicts entrenched norms, beliefs or paradigms.

How many unlamented individuals are to die due to the Semmelweis Reflex in economics?

For BTPS & SPGBs all inter dealer screens have gone blank

As previously discussed, it’s hard to see how anyone with fiduciary responsibility can buy Italian debt or any other member nation debt after EU officials announced the plan for 50% haircuts on Greek bonds held by the private sector.

Yes, all governments have the authority, one way or another, to confiscate an investors funds. But they don’t, and work to establish credibility that they won’t.

But now that the EU has actually announced they are going to do it, as a fiduciary you’d have to be a darn fool to support investing any client funds in any member nation debt.

The last buyer standing is and was always to be the ECB, which will now be buying most all new member nation debt as there is no alternative that includes survival of the union.

And when this happens there will be a massive relief response, as the solvency issue will be behind them, with the euro firming as well.

Then the reality of the state of their economy take over, as GDP continues to fade and unemployment continues to rise until they figure out austerity can’t work and instead they need to proactively increase their member nation’s budget deficits.

Hopefully this doesn’t take quite so long as it took to figure out the ECB has to write the check.

But this one might take even longer as it will be a function of blood in the streets rather than funding capacity.

   
>   (email exchange)
>   
>   On Wednesday, November 09, 2011 5:37 AM, Dave wrote:
>   
>    For BTPS & SPGBs all inter dealer screens have gone blank and there is no liquidity left.
>    There are really no quotes for even 10y BTPs for example and the last bids were hit
>    about 80BP wider for the day vs Bunds.
>   

From a friend in the euro zone public financial sector

“The problem is that in Europe you have 2% of people, acting in bad faith, that pursue the agenda that Alain Parguez has denounced several times and who are also unfortunately in top decision making positions. Then there is the 0.001% of people who understand the problems and try to solve them, but in general they have limited influence. Finally the 98% majority, composed of perfect idiots, is mostly influenced by the first group and thinks the second group is made of marginal people and dangerous side-liners.”

AMI Perpetrated Innocent Fraud

For all practical purposes, fractional reserve banking ended in 1934 when we went off the gold standard. Today’s banking is not reserve constrained.

At best, this is a case of innocent fraud.

Telling that Kucinich was convinced to go along with this.

Nor are there any critics in the media I’ve seen who know any better.

AMI wrote:
Dear Friends of the American Monetary Institute,
(Please pardon multiple emails)
 

A positive note and appeal on the last day of the year:
 

On December 17th, major progress occurred towards monetary reform when Congressman Dennis Kucinich (D, Ohio) introduced legislation which changes a corrupt private money system using bank credit for money, into to a sustainable and just system based on using government created money, under our constitutional system of checks and balances. It ends whats known as fractional reserve banking!
 

He called it the National Employment Emergency Defense Act (“NEED”) HR 6550 because it would solve the unemployment crisis our nation is in. It solves many other crises as well. Please ask your representatives, whether Republican or Democratic to read it here http://www.govtrack.us/congress/billtext.xpd?bill=h111-6550
 

This is an important monetary step forward for our people and for humanity. Progress consists of taking such steps in the right direction, educating people and gaining their support. It will take time and a sustained effort. It needs to be supported, both verbally and financially. We deeply thank those of you who are giving such support.
 

Now if you have not gotten to that stage yet, the American Monetary Institute does need your help: If you understand the importance of what we do, and appreciate the work we do, please make a tax deductible donation to the institute of $25, $50 or more, by sending your check payable to the:
 

American Monetary Institute
P.O. Box 601,
Valatie, NY 12184
 

You can also donate through PayPal using the donate buttons at our website at http://www.monetary.org
If you have not yet read The Lost Science of Money book, this is a good time to order it, at our home page.
 

The stage has been set by Congressman Kucinich for 2011 to be an important year to discuss and gain support for this “NEED” Act, HR 6550. Thats a part of what we do. Please help the American Monetary Institute continue to develop materials that educate our citizenry on how beneficial this non-partisan Act would be for our nation and give what you can.
 

I hope you had good Christmas holidays and wish you a Happy New Year!
Warm regards,
Stephen Zarlenga

Jim Grant-Fed Would Be Shut Down If It Were Audited


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On Wed, Jun 10, 2009 at 8:48 PM, Scott Fullwiler wrote:

(email exchange)

>   On Wed, Jun 10, 2009 at 8:48 PM, Scott Fullwiler wrote:
>   
>   Thanks, Ian.
>   
>   Warren . . . Ian was one of my students at your presentation last week . . . some people are
>   learning how this works, at least. I feel like a proud papa!

Yes, congrats!

I’m nominating this for both the stupidest article of the year and the stupidest article of all time in the category of ‘statements by economic experts:’

And it was only a few weeks ago Bernanke explained the Fed/government makes payments by simply changing numbers in bank accounts and that their spending is not operationally constrained in any way by revenues.

Fed Would Be Shut Down If It Were Audited, ‘Expert’ Says

June 10th (CNBC)—The Federal Reserve’s balance sheet is so out of whack that the central bank would be shut down if subjected to a conventional audit, Jim Grant, editor of Grant’s Interest Rate Observer, told CNBC.

With $45 billion in capital and $2.1 trillion in assets, the central bank would not withstand the scrutiny normally afforded other institutions, Grant said in a live interview.

“If the Fed examiners were set upon the Fed’s own documents-unlabeled documents-to pass judgment on the Fed’s capacity to survive the difficulties it faces in credit, it would shut this institution down,” he said. “The Fed is undercapitalized in a way that Citicorp is undercapitalized.”


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Roubini on Chinese Reserve Currency


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(email exchange)

>   On Fri, May 15, 2009 at 9:22 AM, wrote:

>   Hi Warren. Roubini (the contemporary Dr. Doom) is suggesting this morning that
>   the Chinese currency should be the new global reserve currency.
>   
>   Don’t you need a country that runs an external payments deficit (or at least not a
>   surplus)?

Helps a lot! Unless someone out there wants to get short your currency so everyone else can get long!

>   that also has deep and unrestricted capital markets?

At least not restricted to the point no one else can hold financial assets denominated in your currency.

The other big thing that helps is that they all want to export to you.

The word ‘reserve currency’ has come to mean others use it as their fx reserves?

If so, they first must want to have fx reserves, and the usual reason for that is to support their exporters to the region of the ‘reserve currency.’

So he’s saying China is scheming to be a major net importer? Doubt it, though that’s what I would do if I were them.


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German Bad Bank Plan


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(email exchange)

The ‘short cut’ would be to allow banks to mark to model aggressively and then write off the losses over 20 years so the losses don’t alter capital ratios.

And while it does drive down their ‘economic net worth’ and reveals ‘actual shareholder equity’ immediately, as long as they can fund themselves with insured deposits and central bank funding operations, they are not affected.

They may even be allowed to pay dividends based on reported (though arguably overstated) earnings.

And they can still raise new capital if the new investors can get in at levels that give sufficient returns on investment.

Also, as is the case in the various US plans, the price the assets are sold at is critical.

The government does not want to overpay and subsidize bank shareholders, and there is no advantage for a bank to sell too low.

This plan also adds to the ‘financial stress’ of the German national government and weakens its creditworthiness as their economy continues to deteriorate and deficit funding needs grow.

While more support from the ECB has been discussed, it is not a certainty.

>   
>   On Wed, May 13, 2009 at 7:07 AM, wrote:
>   
>   Original Message 5/13 7:02:27
>   The German government today approved a “bad bank” plan to take
>   toxic assets off the balance sheet of banks. The plan will likely be
>   passed by parliament within six weeks.
>   
>   The key idea of the plan is to give banks up to 20 years to cover their
>   losses from toxic structured assets without putting much taxpayer >   money at risk.
>   
>   
>   Judging by the initial draft, the key elements of the plan are:
>   
>   Banks can deposit toxic structured assets at 90% of the book
>   value in an in-house special purpose vehicle (“bad bank”).
>   
>   In return, the banks receive bonds that are guaranteed by the
>   government’s bank support agency (SoFFin) against a fee. The
>   banks thus swap bad assets against good assets.
>   
>   Independent auditors will determine the “true” value of the toxic
>   structured assets.
>   
>   The banks than have up to 20 years to build up reserves in equal
>   annual instalments to cover the difference between the face value
>   (minus the 10% haircut) and the “true” value. In the end, the banks
>   will also have to make up for any difference between the “supposed
>   ”true” value of the toxic assets and the amount that their “bad
>   banks” realise upon winding down the bad assets.
>   
>   
>   The problems of the Landesbanken, which go well beyond toxic structured
>   assets, will be dealt with by a separate procedure to be unveiled within a
>   few weeks.
>   
>   We haven’t seen all details of the law yet, and it may well be changed
>   in parliament.
>   
>   For banks, participation in the scheme is voluntary. The basic idea, namely
>   to ease bank balance sheets constraints up-front and to give them up to 20
>   years time to build up reserves against losses from toxic structured assets,
>   looks sound. As usual, the devil could be in the detail. So far, German banks
>   have accepted government support only late and reluctantly because they
>   consider the conditions attached as too harsh. If few banks participate, the
>   ”bad bank” plan may not much impact on lending behaviour of banks.


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