Posted by WARREN MOSLER on 3rd December 2013
By Bill Mitchell
Posted by WARREN MOSLER on 3rd December 2013
By Bill Mitchell
Posted by WARREN MOSLER on 22nd November 2013
German IFO, GDP & Eurogroup: After last month’s drop to 107.4, MS Research expects the IFO business climate to decline by further 0.4 points to a reading of 107.0 in November. They would expect both business expectations for the next 6 months and current business conditions to have corrected, with the expectations component losing more. The drop in sentiment underscores the fragile nature of the economic recovery and the rising concerns of business leaders about the economic policies likely to be pursued by the Grand Coalition. The PMIs yesterday confirmed that growth in the euro area has stalled in 2H. That said, a surprise shock to the downside will further strengthen case for further ECB measures. We also have the release of Q3 GDP where MS research expects growth to have decelerated materially, with headline growth declining from 0.7%Q to just 0.3%Q. On the policy front, Eurogroup finance ministers will discuss the European Commissions recommendations on the 2014 draft budgets. Market participants are likely to pay close attention to France, Italy and Spain.
Posted by WARREN MOSLER on 5th November 2013
Posted by WARREN MOSLER on 29th October 2013
Do you think they know austerity causes loans to go bad?
Troubled loans at Europe’s banks double in value (FT) European banks’ non-performing loans have doubled in just four years to reach close to €1.2tn and are expected to keep rising. A report by PwC found that non-performing loans (NPLs) rose from €514bn in 2008 to €1.187tn in 2012, with rises in the most recent year driven by deteriorating conditions in Spain, Ireland, Italy and Greece. It predicted further rises in the years ahead because of the “uncertain economic climate”. Richard Thompson, a partner at PwC, said the “reshaping” of European bank balance sheets had several more years to run as lenders shed troubled and unwanted loans and attempted to strengthen their balance sheets. He estimates European banks are sitting on €2.4tn of non-core loans that they plan to wind down or sell off. The first eight months of 2013 have seen €46bn of European loan portfolio transactions, equal to the entire amount recorded in 2012.
Do you think they know higher rates support higher inflation and weaken the currency?
India’s Central Bank Expects Inflation to Remain Stubborn (WSJ) The Reserve Bank of India Monday sounded concern about inflation, which it said would remain outside its comfort zone this fiscal year. In its half-yearly review of macroeconomic and monetary developments, released a day before its monetary-policy meeting, the RBI also highlighted the need to boost economic growth. But its stress was more on inflation. Inflation at the wholesale level—the main measure of prices in India—notched a seven-month high of 6.46% in September. It has remained above the central bank’s comfort level of 5% for four consecutive months through September. The RBI said it expects both consumer and wholesale inflation to remain around their current levels. “This indicates persistence of inﬂation at levels distinctly above what was indicated by the Reserve Bank earlier in the year,” it said.
Posted by WARREN MOSLER on 9th August 2013
The EU is a failed state.
By Szu Ping Chan
August 8 (Telegraph) — Repeated doses of austerity under international bailouts have almost tripled Greece’s jobless rate since its debt crisis began in 2009, weighing on an economy in its sixth year of recession.
Unemployment rose to 27.6pc in May from an upwardly revised 27pc in April, according to data from statistics agency ELSTAT. This is more than twice the average rate in the eurozone, which stood at 12.1pc in June, and is the highest reading since Greece’s statistics office began publishing monthly jobless data in 2006.
This means there are now almost 1.4m people out of work in Greece, and 3.3m people who are considered economically inactive.
Joblessness in the 15-to-24 age group jumped to 64.9pc, from 57.5pc in April.
Greek prime minister Antonis Samaras will hold talks with US President Barack Obama later on Thursday.
Mr Samaras is keen to secure US approval for stimulus policies for Greece’s recession-hit economy, in contrast to the austerity emphasis preferred by many of its European partners, most notably Germany.
In an interview with Greek newspaper Kathimerini, US vice president Joe Biden said America had “a stake” in Greece’s economic recovery and wanted the crisis-hit nation to stay in the eurozone.
“The administration has always taken the view that it’s overwhelmingly in our interest to have Greece remain a strong and vital part of the eurozone,” he said.
“We have a stake in Greece’s success,” Mr Biden added.
Posted by WARREN MOSLER on 25th July 2013
By Jeff Black
July 25 (BN) — Lending to companies and households in the 17-member euro area fell the most on record in June in a sign the region is still struggling to shake off its longest-ever recession.
Loans to the private sector dropped 1.6 percent from a year earlier, the Frankfurt-based European Central Bank said today. That’s the 14th monthly decline and the biggest since the start of the single currency in 1999.
The rate of growth in M3 money supply, which the ECB uses as an indicator for future inflation, fell to 2.3 percent in June from 2.9 percent in May, according to today’s data. That’s below all 30 estimates in a Bloomberg survey of economists.
M3 grew 2.8 percent in past three months from the same period a year earlier. M3 is the broadest gauge of money supply and includes cash in circulation, some forms of savings and money-market holdings.
Posted by WARREN MOSLER on 12th July 2013
Interesting how the weakness seems to be shifting to Germany and France?
By Martin Santa
July 12 (Reuters) — Euro zone factory output fell in May for the first time in four months, data showed on Friday, suggesting a fragile and uneven recovery in the bloc that is struggling with record joblessness and renewed political tensions in southern Europe.
Industrial production in the 17 countries using the single currency fell 0.3 percent on the month, following a revised 0.5 percent increase in April, data from the EU’s statistics office Eurostat showed.
Economists polled by Reuters had expected a 0.2 percent decline in May.
Compared with the same period last year, factory output in May dropped as expected by 1.3 percent, after a 0.6 percent contraction in April.
Production in Europe’s two biggest economies, Germany and France, dropped in May, with Italy and Spain showing small increases. Overall, factory output was dented by a 2.3 percent drop in the production in durable goods, such as cars and TVs.
Germany, France, and Italy account for two-thirds of the euro zone’s industrial output.
Posted by WARREN MOSLER on 1st July 2013
Still contracting but at a reduced pace.
Germany a bit worse and other up a bit may show the squeeze has caused a bit of a shift from Germany to other members as the pie continues to shrink?
In any case, a reduced pace of deterioration does nothing to alleviate the ongoing and intense social pressure that is driving members to the breaking point.
And apparently the EU rejected my proposal for funding 5 billion euro over 5 years to rebuild earthquake damage in Italy, even though the proposal was perfectly legal and well within the spirit of EU policy, etc. My proposal was to allow corporations to accelerate a mere 5 billion of tax payments from 10 years forward where the EU forecasts show excess revenues, to be applied over the next 5 years for the rebuilding of the recent damage to L’Aquila that killed over 300 people.
And most disturbing is that the rejection has every appearance of malice.
And clearly any monetary arrangement, such as the euro zone, that can’t find a way to rebuild earthquake damage of a fraction of a % of GDP in the face of gaping output gap makes no economic sense whatsoever.
July 1 (Bloomberg) — Manufacturing output in the euro zone improved in June to a 16-month high, a sign that the economy was stabilizing, albeit slowly.
The euro zone June Purchasing Managers’ Index for the manufacturing sector rose to a 16-month high of 48.8, up from the flash estimate of 48.7 and May’s reading of 48.3.
But the readings for individual countries revealed a more mixed picture.
The data were particularly strong for Italy, where June manufacturing PMI rose to 49.1, the highest since July 2011 and Spain, where manufacturing PMI rose to 50 in June from 48.1 in May. French PMI also rose to 48.4 in June from 46.4 in May. A reading above 50 indicates an expansion, while a reading below indicates a contraction.
However, German manufacturing activity contracted for the fourth consecutive month in June, coming in below expectations at 48.6.
“I think it tells us two things. One, it tells us that the euro zone as a whole is gradually beginning to stabilize. I think that’s obviously very good news. Probably, the more important part of the data is the split and the fact that we are beginning to see stronger PMI data from the likes of Spain and Italy. That may settle some people’s concerns about the recovery in those countries,” Darren Williams of AllianceBernstein told CNBC.
The euro zone has been in a recession for a year-and-a-half and any signs of stabilization will ease pressure on the European Central Bank to expand monetary policy to boost growth.
“June’s improved purchasing managers’ survey supports hopes that overall manufacturing activity across the euro zone is on the brink of stabilization. This reinforces hopes that euro zone GDP could finally have stopped contracting in the second quarter after a record six quarters of decline,” Howard Archer, European economist at IHS Global Insight said.
But Archer added that conditions remain far from easy for euro zone manufacturers. “The upside for domestic demand in the euro zone remains constrained by restrictive fiscal policy in many countries (despite increased flexibility now being allowed on fiscal targets), still tight credit conditions, high and rising unemployment, and limited consumer purchasing power.”
The PMI readings came ahead of inflation data which showed that euro zone consumer inflation accelerated to 1.6 percent in June from 1.4 percent in May. Meanwhile, unemployment for the euro zone rose to a record high 12.1 percent in May, from a revised rate of 12 percent in April.
Posted by WARREN MOSLER on 30th May 2013
Takeaway is underlying private demand was stronger than initially reported, government was more of a drag and inventories have more room to expand.
Yes, but note this:
The drag from government and inventories was partially offset by an upward revision to consumer spending, which rose at a 3.4 percent annual rate, up two tenths of a point from the government’s previous estimate. However, a cloud hung over that category, as most of the upward revision was due to higher sales of gasoline. Higher prices at the pump are a burden on consumers, leaving them less money to spend on other things.
After-tax corporate profits fell at a 1.9 percent annual rate in the quarter, the first decline in a year.
Optimism on late 2013 and 2014 growth (Rosengren speech yesterday) stems from government consumption turning from being a drag to neutral sometime in Q3 or Q4, leaving in place the underlying pace of private demand growth of about 3%.
Yes, the question being ‘leaving in place’, as govt spending feeds private sector sales, etc.
So the assumption is the private sector spending that’s been taking place will continue at that pace post tax hikes and sequesters. And note that growth in the credit driven spending (cars, appliances, housing) is showing at least hints of slowing.
Department of Labor reported 5 states didn’t complete their claims count last week due to the holiday, so the rise in claims to 354k to be taken with a grain of salt.
Yes, but here too are at least hints that claims bottomed a few weeks ago and have edged a bit higher since then, and that Non Farm Payrolls peaked in Feb, and if next weeks number prints at 150,000 the three month average is back down to around that level.
And, again, it’s the year end tax hikes and subsequent sequesters that are causing me to look for evidence of subsequent slowing.
This is notable for Italian (and European) growth. Eur10bn (mid-point of estimates below) is worth about a 0.5% add to GDP growth:
EU Recommends Removing Italy From Excessive-Deficit Procedure (Bloomberg) The European Commission recommended today lifting an excessive-deficit procedure against Italy after the government brought its budget shortfall within the European Union limit. “Our task is to respect our commitments with Europe and implement the program the parliament has given its vote of confidence on,” Italian Prime Minister Enrico Letta said. Ending the strict EU monitoring of Italian public spending may free up resources of as much as 12 billion euros, Regional Affairs Minister Graziano Delrio said in an interview with daily La Stampa May 27. “The closing of the procedure alone allows us to boost spending by between 7 and 10 billion euros, 12 billion euros in the most optimistic forecast,” Delrio said in the La Stampa interview.
Yes, this would be helpful, but a deceleration in expected US growth hurts Europe as well.
Initial Claims YTD:
Nonfarm Payroll Change YTD:
Posted by WARREN MOSLER on 8th May 2013
Commentary: Warren Mosler has a plan but no takers
By Darrell Delamaide
May 8 (MarketWatch) — If youre ever tempted to think the euro zone has turned the corner and is on the right track, go have a chat with Warren Mosler and hell set you straight.
The former hedge-fund manager and an original proponent of what has come to be known as modern monetary theory gave a talk recently at a wealth management conference in Zurich that took a pessimistic view of the euro righting itself on its current path.
The European slow-motion train wreck will continue until theres recognition that deficits need to be larger, Mosler said at the conclusion of his analysis. The continuing efforts at deficit reduction will continue to make things worse.
Mosler suggested several measures that could turn around the situation in the euro zone, though he acknowledged there is little chance they will be adopted.
The euro authorities need to accept that deficits should be allowed to go up to 8% of gross domestic product, instead of the current 3%, as the only way to create the monetary conditions for full employment and economic growth.
The European Central Bank should make a policy rate of 0% permanent. The ECB, as the source of the euro zones fiat money, should guarantee the debt of all euro countries and guarantee deposit insurance for all euro-zone banks, which would entail taking over bank supervision.
Individual countries in the euro zone, like individual states in the U.S., are trapped in a procyclical monetary and fiscal environment. Because they have no sovereign currency, they must reduce spending in a downturn.
In the U.S., the federal government can operate countercyclically, by running a sufficiently large deficit to provide net savings to the private sector. The ECB is the only institution in the euro zone that does not have revenue constraints and could play a countercyclical role.
Because money is a public monopoly, when the monopolist restricts supply by not running a sufficient deficit, it creates excess capacity in the economy, as evidenced by high unemployment.
Mosler says the deficit can result from lower taxes or increased government spending, whatever your politics prefers. But policies aimed at reducing the deficit are doomed to keep an economy depressed.
And theres more. All successful currency unions include fiscal transfers, Mosler said. In Canada, this is written into the constitution and in the U.S. it is achieved through the federal budget.
In Europe, this would mean that some authority like an empowered European Parliament would direct government spending to the areas with the highest unemployment.
Clearly all of this is well beyond what Europe is currently capable of doing, and the leaders in power have implicitly or explicitly rejected all of these potential fixes.
The reality is, Mosler noted, that there is no political support for higher deficits, no political support for leaving the euro, and beyond reducing deficits the only remaining fixes are taxes on depositors and bondholders like those seen in Cyprus and Greece.
Mosler, who currently manages offshore funds and produces sports cars on the side, says his views, which have been taken up and elaborated by a post-Keynesian school of economics, are based on his experience as a money manager.
And, he adds, he has a substantial following of asset managers for his ideas because these are people who are paid to get it right.
The current stopgap measures proposed by the ECB notably the putative outright monetary transactions to bail out a country under certain conditions, which has yet to be used have a dubious legal basis and are so much smoke and mirrors, Mosler said.
In this Zurich talk, Mosler did not draw any further conclusions regarding his pessimistic view of the euros current course, but a website devoted to Mosler Economics in Italy, where MMT has a considerable following, spells out what it could mean in a post called 10 reasons to return to the lira.
These reasons include the ability to lower taxes, allow the government to pay off debts to the private sector and implement a works program to provide employment and improve the public infrastructure. Read the post (in Italian).
Lest this all seem like so much pie in the sky, keep in mind that the forces that gave the protest movement of Beppe Grillo a quarter of the vote in Italys recent election will only grow as continued austerity deepens Europes recession.
So remain optimistic if you like, but youve been warned.
Posted by WARREN MOSLER on 2nd May 2013
If anyone can get a message to him, please tell him that, functionally, negative rates are just a tax on deposits that ultimately reduces spending/output/employment, much like the PSI did in Greece and whatever you want to call the ‘deposit confiscation tax’ in Cypress.
> (email exchange)
> This is a bit unexpected
*DRAGHI SAYS ECB TECHNICALLY READY FOR NEGATIVE DEPOSIT RATES
*DRAGHI SAYS ECB TECHNICALLY READY FOR NEGATIVE DEPOSIT RATES
“on the deposit facility rate… we are technically ready. There are several unintended consequences that may stem from this measure. we will address and cope with these consequences if we decided to act. We will look at this with an open mind and stand ready to act if needed”
Posted by WARREN MOSLER on 2nd May 2013
Good to see Ken, who I’ve never met, and Carmen who I do know, no doubt assisted by her husband Vince, beginning to come clean with this response. While not complete, it’s the beginning of an encouraging, epic reversal and a first step in the right direction!
My comments added below:
By Kenneth Rogoff and Carmen Reinhart
May 1 (FT) — The recent debate about the global economy has taken a distressingly simplistic turn. Some now argue that just because one cannot definitely prove very high debt is bad for growth (though the weight of the results still say it is),
They could add here ‘though likely via the reaction functions of govts and not the high debt per se.’
then high debt is not a problem. Looking beyond the recent public debate about the literature on debt we have already discussed our results on debt and growth in that context the debate needs to be reconnected to the facts.
Let us start with one: the ratios of debt to gross domestic product are at historically high levels in many countries, many rising above previous wartime peaks. This is before adding in concerns over contingent liabilities on private sector balance sheets and underfunded old-age security and pension programmes. In the case of Germany, there is also the likely need to further cushion the debt loads of eurozone partners.
Adding here ‘as they are ‘users’ of the euro the way US states are ‘users’ of the dollar, and not the actual issuer of the currency like the ECB, the Fed, the BOE, the BOJ, and the rest of the world’s central banks.’
Some say not to worry, pointing to bursts of growth after the world wars. But todays debts,
Add ‘while they pose no solvency risk for the issuer of the currency.’
will not be dealt with by boosts to supply from postwar demobilisation and to demand from the lifting of wartime controls.
To be clear, no one should be arguing to stabilise debt, much less bring it down, until growth is more solidly entrenched if there remains a choice, that is.
BRAVO!!!! And add ‘as is always the case for the issuer of the currency.’
Faced with, at best, haphazard access to international capital markets and high borrowing costs, periphery countries in Europe face more limited alternatives.
Add ‘as is the case for ‘users’ of a currency in general, including the US states, for example’.
Nevertheless, given current debt levels, enhanced stimulus should only be taken selectively and with due caution. A higher borrowing trajectory is warranted, given weak demand
and low interest rates,
Add ‘which are confirmation by the CB policy makers who set the rates low that they too believe demand is weak’.
where governments can identify high-return infrastructure projects. Borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower. We have argued this consistently since the outset of the crisis.
BRAVO! And add ‘additionally, weak demand can be addressed by tax reductions, recognizing that counter cyclical fiscal policy of currency users, like the euro zone members, requires funding support from the issuer of the currency, which in this case is the ECB.’
Ultra-Keynesians would go further and abandon any pretense of concern about longer-term debt reduction.
Add ‘without a credible long term inflation concern, as for the issuer of the currency inflation is the only risk from excess demand.’
This position has been in the rhetorical ascendancy in recent months, with new signs of weaker growth. It throws caution to the wind on debt
Add ‘with regards to solvency, as is necessarily the case for the issuer of the currency.’
and, to quote Star Trek, pushes governments to go where no man has gone before
Add ‘apart from war time, when the importance of maximum output and employment takes center stage.’
The basic rationale
Add ‘of the mainstream deficit doves (not the ultra Keynesian MMT school of thought)’
is that low interest rates make borrowing a free lunch.
Add ‘the mainstream believes’
ultra-Keynesians are too dismissive of the risk of a rise in real interest rates. No one fully understands why rates have fallen so far so fast,
Add ‘apart from the Central Bankers who voted to lower them this far and this fast, and in some cases provide guarantees to other borrowers.’
and therefore no one can be sure for how long their current low level will be sustained.
Add ‘as it’s a matter of second guessing those central bankers.’
John Maynard Keynes himself wrote How to Pay for the War in 1940 precisely because he was not blas about large deficits even in support of a cause as noble as a war of survival. Debt is a slow-moving variable that cannot and in general should not be brought down too quickly. But interest rates can change rapidly.
Add ‘all it takes is a vote by central bankers.’
True, research has identified factors that might combine to explain the sharp decline in rates.
Add ‘in fact, all you have to do is research the votes at the central bank meetings.’
Add ‘by central bankers’
over potentially devastating future events such as fresh financial meltdowns may be depressing rates. Similarly, the negative correlation between returns on stocks and long-term bonds, while admittedly quite unstable, also makes bonds a better hedge. Emerging Asias central banks have been great customers for advanced economy debt, and now perhaps the Japanese will be once more. But can these same factors be relied on to keep yields low indefinitely?
Add ‘In the end, it’s all a matter of the central bank’s reaction function.’
Economists simply have little idea how long it will be until rates begin to rise. If one accepts that maybe, just maybe, a significant rise in interest rates in the next decade
Add ‘due to inflation concerns’
might be a possibility, then plans for an unlimited open-ended surge in debt should give one pause.
Add ‘if he does not see the merits of leaving risk free rates near 0 in any case, as there is no convincing central bank research that shows rate hikes reduce inflation rates, and even credible theory and evidence to be concerned that rate hikes instead exacerbate inflation.’
What, then, can be done? We must remember that the choice is not simply between tight-fisted austerity and freewheeling spending. Governments have used a wide range of options over the ages. It is time to return to the toolkit.
First and foremost,
Add ‘who fail to recognize that these are merely matters of accounting that don’t themselves alter output and employment’
must be prepared to write down debts rather than continuing to absorb them. This principle applies to the senior debt of insolvent financial institutions, to peripheral eurozone debt and to mortgage debt in the US.
For Europe, in particular, any reasonable endgame will require a large transfer
Add ‘of public goods production’
from Germany to the periphery.
Add ‘which in fact would be a real economic benefit for Germany.’
The sooner this implicit transfer becomes explicit, the sooner Europe will be able to find its way towards a stable growth path.
There are other tools. So-called financial repression, a non-transparent form of tax (primarily on savers), may be coming to an institution near you. In its simplest form, governments cram debt into domestic pension funds, insurance companies and banks
By removing governmental support of higher rates from their net issuance of debt instruments, particularly treasury securities.
Europe is there already and it has been there before, several times. How to Pay for the War was, in part, about creating captive audiences for government debt. Read the real Keynes, not rote Keynes, to understand our future.
One of us attracted considerable fire for suggesting moderately elevated inflation (say, 4-6 per cent for a few years) at the outset of the crisis. However, a once-in-75-year crisis is precisely the time when central banks should expend some credibility to take the edge off public and private debts, and to accelerate the process bringing down the real price of housing and real estate.
It is therefore imperative for the central bankers to make it clear to the politicians that there is no solvency risk, and that central bankers, and not markets, are necessarily in control of the entire term structure of risk free rates, and that their research shows that rate hikes are not the appropriate way to bring down inflation, should the question arise’
Structural reform always has to be part of the mix. In the US, for example, the bipartisan blueprint of the Simpson-Bowles commission had some very promising ideas for simplifying the tax codes.
There is a scholarly debate about the risks of high debt. We remain confident in the prevailing view in this field that high debt is associated with lower growth
Add ‘but must add that the risk is that of misguided policy response, and not the level of debt per se.’
Certainly, lets not fall into the trap of concluding that todays high debts are a non-issue.
Add ‘as we must be ever mindful of the possibility of excess demand using up our productive capacity’
Keynes was not dismissive of debt. Why should we be?
The writers are professors at Harvard University. They have written further on carmenreinhart.com
Posted by WARREN MOSLER on 23rd April 2013
Again, very well stated!
I must admit that I am at a loss for words these days. The analytical items at our disposal describe a situation so complex, given a myriad of contradictory influences, that I find it impossible to develop any sort of reasonable scenario.
I have spent a lot of time in recent weeks exchanging ideas and perceptions with academics, political officials and others in an effort to develop a coherent explanation of the events unfolding before us (Cyprus, wealth tax, etc.), but the conclusions are anything but conclusive!
Changes in financial securities will no longer be determined by purely economic factors but more and more by political decisions, such as whether or not to establish a real European banking union with all that implies in terms of cross-border budget transfer risks.
Whatever, lets take a look at the state of the real economy in the United Sates and Europe, given that it is still a bit early to draw any sort of conclusions about a third economic motor, Japan.
By the way, I strongly recommend that people check out the links in todays Macro Geeks Corner toward the end of the newsletter. It is interesting to see how two fairly divergent schools of thinking (the two first texts) end up with rather similar conclusions.
In the United States, the economy is (logically) slowing as the effects of the Sequester slowly make themselves felt. Only the (increasingly discredited) partisans of Reinhold & Rogoffs constructive austerity thought it would not affect household consumption.
We had to wait for the hike in payroll taxes for the effect to be seen in retail sales figures, down 0.4% in March. Similarly, all the latest leading economic (PMI) and confidence indicators came in below expectations, which augurs for a soft patch in the US.
Moreover, the yens decline can only have a negative impact on America trade balance with Japan as it puts US exporters at a disadvantage, in particular, as they compete with their Japanese rivals on Asian markets. And the pitiful state of the European economy is not going to help this sector of the US economy either.
But there remains one bright spot, namely the residential real estate market, which should remain a powerful support in the quarters ahead. Check out one of my favorite graphs real animal rates.
Real animal rates in the US:
Full size image
These rates are calculated using a proprietary equation I developed, which includes, in addition to terms like mortgage interest rates, recent home price trends, the difference between the reported unemployment rate and that during periods of full employment, and the difference between the average length of unemployment and that existing in times of full employment.
With the Animal Spirits so dear to Keynes and behavioral science in mind, the goal was to factor in items more subjective than simple economic criteria (nominal borrowing rates) in the home purchase decision-making process of a household.
If experience has taught us anything, it is that the factors which most influence a potential homebuyers decision is his degree of job security and the feeling that prices can only rise.
The first point is that the only time these real animal rates dipped into negative territory (in the upper part of graph, transcribed in inverted scale) corresponds perfectly with the great real estate bubble of 1998 to 2006.
This big trend reversal occurred in 2006 when rates resurfaced above zero and thus below the graphs red line.
The only other time real animal rates became negative was in 1989, but that was abruptly reversed by the sharp hike in nominal interest rates.
In the current context, nominal interest rates are unlikely to undergo any such sharp hike in the quarters ahead, and this dip of real animal rates into negative territory should enable the real estate market to continue to recover. This all the more true, given that the yens decline will only strengthen disinflationary trends in North America, which ensure accommodative monetary policies for some time to come!
All you need to do is look at the steep decline in inflationary expectations, as expressed by the TIPS market in the US, to understand that investors seem to have finally realized that QE policies have nothing to do with the so-called dollar printing press. Notwithstanding the ZeroHedge paranoids!
That said, existing home sales in the US, out just a few minutes ago, came in weak, at -0.6% m-o-m (vs expected +0.4%, i.e. 4.92M vs 5M), which explains this afternoon shiver on stockmarket indices.
Now, as the IMF has said in recent days, the main brake on a worldwide recovery is the Eurozone, which remains paralyzed by the obsession of its northern member states on austerity and by the ECBs total and unforgivable incapacity to comply with its own mandate! In todays Macro Geeks Corner, you will find two instructive links on this matter.
Instead of harping on the endless stream of errors made by our beloved European monetary and governmental leaders, I prefer to comment on some far more instructive graphs.
Lets start with our graph on aggregate 2-year Eurozone government bond rates, which have proven to be so useful in recent years for evaluating the ECBs reaction function.
This rate, currently at a record low 0.55%, is now well below the 0.75% set for the refi. This stems from two factors.
First, in view of the state of the economy and the latest comments by certain ECB board members, investors expect that the refi rate will very soon (May or June) be cut to 0.50%.
Second, certainty that short-term interest rates, like the Eonia, which have been stuck between 5 bps and 12 bps for the past 9 months, are not going to rise anytime soon is pushing investors to seek yields wherever they can still find them, like in Spain and Italy where 2-year bonds still fetch between 1.95% and 1.25%, now that they are assured that, henceforth, in case of insolvency, bank depositors will be forced to pay the bill without pushing sovereign issuers into default, as happened in Greece!
Aggregated Eurozone government 2-year rate:
Full size image
However, we have reason to be concerned that the ECB, if it does lower the refi to 0.50%, will be satisfied with what it already deems a low rate and highly accommodative monetary policy. Such is far from being the case, even if we go by the ECBs own obsolete aggregates, like M3, as money velocity continues to skid to a halt, following Cyprus.
And all this has an impact on the real economy, as you can see in the following graphs.
Eurozone Industrial Production
Full size image
The least we can say is that this graph is particularly distressing. Of course, it does not account for the economys industrial aspect, which some call the old economy. But it provides a whole lot of jobs and no economic area can afford to neglect it.
And the impact of Mr Sarkozys renowned Walk of Canossa, following his summons by Ms Merkel in July 2011 to Berlin where the unfortunate decision to create the first sovereign default of a developed country was endorsed (Greek PSI), is very clear on this graph. Together with a hardening of austerity policies and the nefarious consequences of the ECBs hikes of benchmark interest rates in the spring of 2011, this decision torpedoed already distressed economies, with the consequences we all know today.
But if there is one depressing economic indicator, which reflects even more cruelly how austerity affected the Eurozone, it is surely the unemployment curve.
Full size image
Here again, no comment is needed. I included earlier in this newsletter the graph comparing the US and Eurozone curves, but even that is no longer all that relevant. If people are happy to underperform the United States, who cares? If the Eurozone wants to try liquidationist economic policies to help drive home the morality message, it has every right to do so, just as its citizens merit the leadership they elect.
But to go from there to creating a situation of hysteria, leading to an increasingly large segment of the active population being ejected from the labor market, is a big step that must never be taken.
In some countries, the figures are just horrifying, with nearly 30% general unemployment and over 50% for those under 25 years of age. It is incredible that some continue to boast the merits of such policies for countries like Ireland while ignoring the daily siphoning of the population due to massive immigration to seek jobs elsewhere!!
I wonder if those responsible for such policies have forgotten the consequences of such an approach in Europe and the breakdown in the social fabric during the Great Depression, especially now, with so many leaders spicing their speeches with anti-German references?
This pathetic situation, reflecting month after month of economic policies based on no worthwhile or credible foundations, be it on a theoretical or empirical basis, explains why I am having a hard time re-establishing a decent pace of publication.
This is especially so in that the conflict between this depressive macro situation and the strong efforts undertaken by the Fed and the BoJ (among others) to reignite economic activity leave no space for laying out clear asset allocation biases.
We continue to enable our clients to take advantage of opportunities on option markets which make it possible during these troubled times to make bets on the cheap but without any real conviction.
Has our asset allocation strategy, dating from 2007 (a bit early, I know), of favoring government debt came to maturity with German 10-year rates at 1.23%, i.e. more than 30 bps below those of the United States?
Will European stock markets continue to suffer from our big fear, the Japanese syndrome? Or will popular pressure push the ECB and the Austrian School proponents to realize that they have a modern currency at their disposal and that reversing their entire intellectual edifice is possible?
Despite all my efforts, studies, reading and discussion, I am totally incapable of responding to these questions, which a great lesson in humility. Sorry for the consequences in terms of this newsletters clarity and frequency of publication, but if anyone has any ideas, I am all ears!
The Macro Geeks Corner:
Dear Northern Europeans Monetary easing is not a bailout
A factual rebuttal of remarks of ECB chief Jrg Asmussen, made at the Bank of America/Merrill Lynch Investor conference
Breaking bad inflation expectations
Posted by WARREN MOSLER on 27th March 2013
> (email exchange)
> Dijsselbloem made very clear that the shareholders, then the bondholders and then the
> uninsured deposit holders are at risk when a bank gets into problems.
> Looks like eur / usd will go down until Draghi comes out and says that the ECB will do
> whatever it takes to protect depositors. How do you see eur / usd now that this Cyprus
> precedent is set and Dijsselbloem’s clear statements?
Good question! Technically the euro goes down from portfolio shifts. But the euro also gains fundamental support from the coercive reduction of net financial assets.
The yield spreads adjust to discount the risk of confiscation, further supporting the German premium regarding member nation debt.
It would be the same with bank deposits but for the ECB’s lending to banks capping funding costs. So more deposits shift to German banks and ECB lending increases.
The Greek PSI was declared a one and only event but now the credibility of that and any other proclamation is gone.
‘Whatever it takes’ now clearly includes taxing bank deposits as well as bond holdings, and not to forget transactions taxes.
All for the further purpose of debt reduction, also known as the reduction of net financial assets of the non government sectors.
The very promise of the euro has turned from harmony and growth to blood sweat and tears without end, and without further public purpose.
All begging the question:
‘So what’s the point?’
> On Monday evening there was a long interview with Dijsselbloem on Dutch TV after the
> markets reacted so heavily in the afternoon after his remarks. He did not take one word
> back. Indirectly his statements made very explicit that the deposit guarantee system in
> the euro zone has its limits due to the limits of the member states that are not
> monetarily sovereign anymore. When the interviewer asked him if the 100K limit is not
> too high, He admitted that it is very high. He did not yet make the step that only a
> guarantee from the ECB would be credible and able to cover 100% of deposits.
Posted by WARREN MOSLER on 22nd March 2013
Proposals from earlier today:
ECB guarantees deposits for .25% annual fee
ECB takes over regulation, supervision, enforcement of banking regs etc.
This becomes the model for regulating all EU banks
I finally got a quick minute to add some color to the above proposals from earlier today.
With about 70 billion in assets, the banking system has negative capital of about only 2 billion, or about 3% of assets. And that no doubt includes markdowns on EU member nation debt that ‘goes away’ with the ECB ‘doing what it takes’ to sustain solvency.
With ECB deposit insurance the liquidity issue goes away, so the approx 10 billion in loans won’t be applicable, and ‘regulatory forebearance’ can then obviate the need for the rest of the proposed and highly controversal and problematic ‘rescue package.’
Additionally, the cost of funds goes down, so net interest margins widen to promote internal capital rebuilding.
ECB regulation will include ‘regulatory forebearance’ where the banks are allowed to operate with current levels of negative capital under strict ‘tarp like’ terms and conditions- no dividends, salary and bonus controls, credit quality criteria, etc. etc. and not to neglect thorough investigations into criminal activity and prosecution.
When capital ratios are brought into compliance with BASIL levels either through earnings and/or raising new equity the ECB can remove the ‘special requirements and restrictions’ imposed due to insufficient capital.
The ECB, like all central banks, will ultimately insure all bank deposits and also do the regulation. It’s already pretty much doing this indirectly. Cyprus is an opening to do it directly, and get the process down there first before expanding to the rest of the ECB’s member banks.
Posted by WARREN MOSLER on 21st March 2013
The single most important economic indicator in Europe was released today, the Composite PMI.
For March, it was expected to increase to 48.2 from 47.5; it fell to 46.5, the lowest level since November.
In the U.S.:
So, latest NowCasting forecasts:
Europe: Q1 -0.8% and Q2 revised from +0.1% to -1.05% after todays data
U.S.: Q1 +2.6% and Q2 revised from 2.8% to 3.4% over the past week (they will not account for sequester hit as forecast simply based on incoming data flow).
Euro PMI (white) vs U.S. ISM Mfg (orange) and Services (yellow): link
Posted by WARREN MOSLER on 20th March 2013
Posted by WARREN MOSLER on 19th March 2013
Many have proposed negative interest rates as further ‘easing’ to help the economy.(too many, actually)
The proposed deposit tax in Cypress is functionally a one time negative interest rate. So maybe if they made it annual- just like the negative interest rates proposed elsewhere- it would help the economy?
So as previously discussed, I still see it in a spectrum. Positive rates are a govt subsidy and negative rates a tax. And so the Fed’s rate cuts and QE removed the prior subsidy, for example.
Posted by WARREN MOSLER on 17th March 2013
As suspected the PSI/bond tax/deposit tax has become more attractive politically than other tax hikes and spending cuts. And it is also deflationary/contractionary, though less so than other taxes. And yes, it destabilizes the banking system in general.
In the early hours of Saturday morning, after 10 hours of talks, finance ministers from euro area countries, the International Monetary Fund and the European Central Bank agreed on terms that include a one-time tax of 9.9 percent on Cypriot bank deposits of more than $130,000, or 100,000 euros, and a tax of 6.75 percent on smaller deposits, European Union officials said.
Posted by WARREN MOSLER on 12th March 2013
How stupid is this?
Unless they want to reduce funds available to distribution to the members?
By Jeff Black & Stefan Riecher
March 12 (Bloomberg) — Germany’s Bundesbank almost doubled its risk provisions in 2012, citing increased potential for losses stemming from the European Central Bank’s monetary policy.
The Frankfurt-based central bank increased provisions for general risks by 6.7 billion euros ($8.7 billion) to 14.4 billion euros, it said in an e-mailed statement today when releasing its 2012 annual report. Due to higher interest income, the Bundesbank’s profit rose to 664 million euros from 643 million euros in 2011. The increase in provisions stems from the ECB’s enhanced support of the financial sector over the course of the year, the Bundesbank said.
“The past year had seen an overall increase in counterparty credit risks stemming from refinancing loans and purchasing bonds,” Bundesbank President Jens Weidmann said in the statement.
The ECB injected more than 1 trillion euros into the banking system with two three-year refinancing loans designed to avoid a credit crunch. Some 22 percent of those loans have since been paid back as the ECB’s pledge to buy unlimited government bonds if certain conditions are met eased tensions on financial markets.
Weidmann reiterated in a foreword to the annual report that the Bundesbank is critical of some of the measures taken by the ECB because “they blur too much the responsibilities of monetary and fiscal policies.”