Draghi Says Conditions Considerably More Favorable Than Last Yr

As previously discussed, looking like deficits high enough for stability and even modest growth, albeit with output and employment at tragically low levels, if they don’t further tighten fiscally.

It didn’t have be this way. They could have increased deficits pro actively vs via austerity.

Also, their ‘automatic fiscal stabilizers’ are very strong and, even if all is left alone, will tend to keep any recovery muted.

EU Headlines
Draghi Says Conditions Considerably More Favorable Than Last Yr
Merkel Takes Swipe at Yen
German Business Sentiment Rose More Than Forecast in January
Ifo Business Climate Index Rises
German Cooperative Banks See Growth Exceeding Government Outlook
France needs time to overtun rampant jobless rate: minister
Monti Says Monte Paschi Bailout Hinges on Bank of Italy
Italian PM under fire over bank crisis
Spain tries to peel back business rules

Rehn on Spain says no more pain…

Sorry about the title
Couldn’t help myself…
;)

No further austerity for Spain, says Rehn

November 15 (FT) — Spain will need no further austerity measures until the end of next year even though it will easily miss its deficit targets, EU economic commissioner Olli Rehn, said. We are not so much focused on the nominal targets, even though they often make easier headlines because they are exact percentages, Mr Rehn said. To my mind, [it is] both the right way of doing it from an economic point of view but also the correct way of applying [EU rules]. He added that Spain must still do more in 2014, when Madrid is required to get its budget deficit, which was 11 per cent of gross domestic product at the end of last year, down below the EU threshold of 3 per cent. Spain was supposed to reduce its deficit to 6.3 per cent of GDP this year and 4.5 per cent next year.

more on the cliff

Stocks down again yesterday but interestingly bond yields up a tad, dollar down a tad, oil and metals up, and even long BMA ratios holding steady, etc.

The cliff isn’t nearly as large and threatening as the debt ceiling cliff would have been in 2011 if that thing hadn’t been extended, and we’d gone cold turkey into an immediate and forced balanced budget. But that event is the stock market’s ‘recent memory’ of stock market reaction functions.

And this time GDP is being supported by a private sector credit expansion/housing expansion, with private debt service ratios substantially lower due to cumulative federal deficits adding to nominal ‘savings’. And the federal deficit remains well above 5% of GDP, which historically has been more than enough to reverse a recession.

And then there’s the election factor. Post election I’m hearing (anecdotally) distraught Romney supporters thoroughly convinced the President is a ‘socialist’ bent on destroying capitalism, taxing the rich ‘job creators’ and giving it to what Romney called ‘the 47%’ dependent class, etc. etc. etc. Merits of this ‘belief’ aside, it looks to me it’s driving portfolios to shift out of equities. However, if not supported by an actual decline in earnings, which is how I see it, it’s all a case of ‘pushing on a spring’.

Yes, the euro zone is a problem, with Q3 GDP just reported at -.1%. But that’s an ‘improvement’ from q2’s -.2% as larger deficits are acting counter cyclically to cushion the austerity driven decline. And Rehn was just quoted on Spain favoring not adding to austerity measures, perhaps indicating a move to ‘let it be’ for a while, which will allow GDP to stabilize at modestly positive levels.

And China is no longer going backwards, so that negative has been reversed as well.

Back to the cliff, in fact letting tax rates go up for high income earners should have little effect on GDP, as the marginally propensity to spend for that segment is reasonably low. (of course that means there’s no point in taxing that income in the first place, but that’s another story). Nor does it mean investment or employment will suffer since investment is driven by sales prospects. And with higher tax rates, and business expense tax deductible, the after tax cost of investment goes down with higher tax rates. For example, in the 70’s, when my tax rate was around 70%, I clearly recall making very high risk investments figuring it was better than giving 70% to the govt. Point is, taxing income and savings that isn’t going to be spent is about social engineering, and not ‘funding the deficit’ or altering aggregate demand, and is intellectually honestly framed as such. So point here is, I score the effect of raising the highest tax rates at 0 regarding aggregate demand.

This all supports my take that the stock market has over discounted the cliff, partly for ideological reasons, partly due to the recent memory of what stocks did during the debt ceiling debacle, and partly from fear of what’s going on in the rest of the world.

So as we get through it all with modest top line and earnings growth continuing, I’m looking for valuations to quickly return to at least where they were before the election.

Draghi Says ECB Stands Ready to Buy Bonds as economoy weakens

I guess he doesn’t realize the bond buying is about solvency, not aggregate demand.
Probably didn’t teach that at MIT or any of those other fancy places:

He was born in Rome, where he studied at the Massimiliano Massimo Institute and graduated from La Sapienza University under the supervision of Federico Caffè. Then he earned a PhD in economics from the Massachusetts Institute of Technology in 1976 under the supervision of Franco Modigliani and Robert Solow. He was full professor at the Cesare Alfieri Faculty of Political Science of the University of Florence from 1981 until 1994[3] and fellow of the Institute of Politics at the John F. Kennedy School of Government, Harvard University (2001).

Draghi Says ECB Stands Ready to Buy Bonds as economoy weakens

(Bloomberg) European Central Bank President Mario Draghi said the economic outlook is worsening and the bank stands ready to activate its bond-purchase program if governments fulfil the necessary conditions. “We are ready to undertake” Outright Monetary Transactions, “which will help to avoid extreme scenarios,” Draghi said. “It’s entirely up to Spain and the Spanish government to take the decision,” Draghi said. At the same time, “since the OMT announcement there have been a series of improvements” on financial markets, including “a return of flows from the rest of the world,” he said. “Certainly the outlook is being revised and there’s a picture of a weaker economy,” he said. “The Governing Council decided to keep interest rates unchanged. We have not discussed what we’re going to do next year in terms of monetary policy.”

Forbes article: No, the US will not go into a debt crisis, not now, not ever

>   
>   (email exchange)
>   
>   On Fri, Oct 19, 2012 at 1:09 PM, wrote:
>   
>   Author is self-described conservative.
>   

No, The United States Will Not Go Into A Debt Crisis, Not Now, Not Ever

By Pascal-Emmanuel Gobry

October 19 (Forbes) — If there’s one article of faith in Washington (and elsewhere), it’s the idea that the United States might get into a debt crisis if it doesn’t get its fiscal house in order.

This is not true.

The reason why it’s not true is because we live in a fiat currency system, where the United States government can create an infinite number of dollars at no cost to meet its obligations. A Treasury bill is a promise that the government will give you US dollars– something that the United States government can produce infinitely and at no cost.

That’s the reason why interest rates on United States debt have only gone down even as the debt has ballooned. That’s the reason why Great Britain has very low rates on its debt despite having very high debt-to-GDP. That’s the reason why Japan has an astounding debt-to-GDP ratio and still enjoys some of the lowest rates ever. Investors have bet for so long that there would be a run on Japanese debt and have ended up so ruined that in financial circles that trade is called “the Widowmaker”. (Here’s a more detailed analysis by my former colleague Joe Weisenthal at Business Insider.)

Well, what about Argentina? Argentina had to default on its debt because it had pegged its currency to the US dollar. It wasn’t sovereign with regard to its currency since it had to maintain its currency’s peg. It wasn’t Argentina’s debt that caused it to default, it was its currency peg.

What about Greece? Same thing. Greece hasn’t used its own currency for ten years. Of course it’s going bankrupt.

Does it seem that strange that governments can’t run out of money?

You don’t have to take my word for it. How about Alan Greenspan? He said (PDF): ”[A] government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit.”

But waaaaaaait, you shout, what about inflation? If the government prints money like crazy, won’t that create inflation?

Well, in theory, yes. But probably not. Why is that? Because the US has an even bigger advantage than just being sovereign in its own currency (hi Greece), it also holds the reserve currency. The US dollar is the main currency that is used in most international transactions, it is held by all of the world’s central banks, and so forth.

Why is this important? Well, another way to define inflation is to say that the supply of a currency gets out of whack with its demand: too much currency chasing too few people who want to hold it, and so its value drops. Well, when you have the reserve currency, the demand for your currency is always going to be extremely strong. There’s always going to be tons of people, all around the world, who want to use US dollars, because their transactions are conducted in US dollars. (And it’s highly unlikely that this will change soon–being the reserve currency has a network effect, meaning everyone uses the dollar as the reserve currency because everyone else uses it, creating a self-reinforcing cycle that’s extremely hard to break.)

In other words, while in theory printing tons of money could create inflation, in practice demand for the dollar is so high–and for structural reasons that have very little to do with how the US economy is doing at a particular point in time–that it’s hard to imagine a circumstance under which the US government would have to print so much that it would cause significant inflation.

And even if it did–well, for all the bad memories we have about it, the Stagflation of the 1970s was many things, but it was not Greece. Life in the 1970s was still relatively okay, despite the stagflation. That is to say, even in the extremely unlikely event that the government had to print so much money to get out of its debt that it caused moderate inflation, it still would not be a debt crisis of the kind that Greece and Spain are under right now. (Hyperinflation, meanwhile, is even less of a danger, since in recorded history it only happens in cases of not just reckless money printing, but also extremely serious exogenous shocks such as war, regime change, etc.)

Why am I writing this?

After all it’s already common knowledge among economists, Fed officials, and an increasing number of sophisticated investors.

Maybe so, but it’s still not common knowledge among politicians and among the general public. A lot of people still think that the US is under some risk of one day becoming like Greece, and it’s distorting our public debate.

It’s especially distorting it on the Right, where hysteria about deficits, and debt, and becoming like Greece has reached a fever pitch. Paul Ryan, especially, has framed his entire message on entitlement-cutting on the flawed premise that the US needs to cut its entitlement or it will suffer a debt crisis. This message, in turn, has infected broad swathes of the conservative movement (including very smart people in it), a movement that I consider myself a member of and want to see in strong intellectual health. But very few liberals–certainly no Democratic elected officials that I’m aware of, certainly not the President and the Vice President–are disputing the premise that the US is in any danger of a debt crisis.

In future posts, I will try to look at what the conservative movement can do to move past the idea of the debt crisis, and what it means.

Cameron and Draghi continue to push austerity

I wonder what, if anything, it would take to reverse all this self inflicted global destruction.

Clearly evidence and theory isn’t enough.
Too often change comes from some form of ‘blood in the streets’

Draghi Says No Alternative to Austerity as Economies Shrink

By John Fraher and Jeff Black

October 9 (Bloomberg) — European Central Bank President Mario Draghi said there is no alternative to austerity as Italian and Spanish officials balk at asking for bailouts that may impose more budget cuts.

“It’s without doubt that the process of fiscal consolidation has depressed output in parts of the euro area,”

Draghi told lawmakers in testimony to the European Parliament in Brussels today. “But what’s the alternative? We need to do that, we need to do that in the best possible way, as effective and as short as possible, complying with basic grounds of social justice.”

European officials are pushing debt-strapped nations across southern European for more cuts despite the risk that they will worsen recessions gripping the region. Draghi last month said that the ECB is prepared to take the unprecedented step of buying unlimited quantities of Spanish and Italian bonds if they sign up to certain conditions.

At the same time, Italian Prime Minister Mario Monti said in an interview last month that uncertainty about what those terms will look like is making him and his Spanish counterpart reluctant to apply for help.

International Monetary Fund Chief Economist Olivier Blanchard today suggested bond yields in Spain and Italy may resume rising if the countries don’t meet investor expectations and seek aid.

Cameron Says U.K. Needs to Implement Plan A Plus on Economy

October 9 (Bloomberg) — Prime Minister David Cameron said the U.K. government needs to implement an economic policy that he called “Plan A Plus,” without abandoning its deficit-reduction strategy.

Cameron was speaking after the International Monetary Fund cut its U.K. economic outlook and said the government may need to ease its fiscal squeeze if Bank of England stimulus fails to help the economy gather momentum. The Washington-based lender said today it sees the economy shrinking 0.4 percent this year before expanding 1.1 percent in 2013. It previously projected growth of 0.2 percent and 1.4 percent in those years.

“What we need is Plan A Plus” Cameron told Sky News television today from his Conservative Party’s annual conference in Birmingham, central England. He said that means pursuing deficit reduction alongside adopting fiscal measures to help businesses as well as easing planning rules to spur enterprise.

His opponents in the Labour Party have called on Cameron to reduce the speed and depth at which he is imposing government spending cuts, saying the government should alter its course to a “Plan B.”

The IMF is “not advising us to change course,” Cameron told BBC Radio 5. “What they says is we should stick to our plans unless things get dramatically worse.”

He said that while “there are signs that the economy is rebalancing,” including an increase in private-sector employment, “we need to do more and we need to do it faster.”

Healing Process

The prime minister said the IMF’s move meant it was falling into line with other forecasters, underlining the need for the government to ensure that its plans to spur growth are “firing on all cylinders.

Speaking to BBC Radio 4’s “Today” program, Cameron said the government is doing everything it can to encourage growth and a “slow and difficult healing process” is now under way.

He said there will be a new crackdown on tax evasion and “aggressive avoidance,” when asked to give details of his promise to take further action to increase taxes on the rich.

Chancellor of the Exchequer George Osborne told the party conference yesterday the U.K. economy is “taking longer” to heal than hoped. Still, he pledged to “finish the job” of reducing the deficit and signaled that deep cuts to welfare will be needed after the next general election in 2015.

Cameron Says IMF Forecast for U.K. Coming Into Line With Others

October 9 (Bloomberg) —Prime Minister David Cameron said the International Monetary Fund’s decision to cut its economic outlook for Britain meant the IMF was falling into line with other forecasters.

Cameron told BBC television from his Conservative Party’s annual conference in Birmingham, central England, that the goverment needs to ensure that its plans to spur growth are “firing on all cylinders,” rejecting calls for more borrowing to fund extra spending. He pointed to an increase in private- sector employment as a sign that the government’s policies are working.

Cliff on ECB

Over 6 weeks ago we distributed the attached Eurosystem Solutions paper.

It described the unique non-standard measures being used for by the Eurosystem and ECB to address bank solvency and national solvency issues and the movement towards a real solution involving the ECB.

Now the ECB has announced what is very close to the real solution: unlimited bond purchases.

Regardless of conditionality, or even in spite of conditionality, this is the crossing of the line into the notion that there is an entity that can credit accounts in Euro in unlimited amounts.

While conditionality is the apparent necessary circumstance, and it’s likely national authorities will play along, these ECB purchases will have to take place regardless of conditionality. If Spain says they can’t comply, is the ECB going to let them default? The ECB has done all this to avoid Spanish default.

The best case is for the markets to recognize the ECB backstop and so regular purchases aren’t very necessary. There will be lots of movement towards coordination of budgets and banking supervision.

But the ECB line has been crossed.

Sixteen years after our AVM/III July 1996 Bretton Woods conference that identified the severe credit problems with the looming Maastrict rules (1/1/99), and eleven years after Warren’s famous paper on the potential European credit crisis “The Rites of Passage” we are finally seeing the necessary repair to the EMU.

There still remain political obstacles, court challenges and the like, but the imperatives to avoid a complete collapse of the Euro financial system have driven virtually all the important constituents to this necessary path of solution.

The 10th plague

As previously discussed, action was taken after the disease began infecting the core.

Headlines:
Germany backs Draghi bond plan against Bundesbank
Bundesbank Says German Economy May Cool Further in Second Half
Spain Home Rents Rise, First Time Since January, Fotocasa Says

And, also as previously discussed, I’m watching for signs deficits may be high enough for
euro zone GDP stability this quarter.

Germany backs Draghi bond plan against Bundesbank

By Ambrose Evans-Pritchard

August 20 (Telegraph) — “A currency can only be stable if its future existence is not in doubt,” said Jrg Asmussen, the powerful German member of the ECB’s executive board. Mr Asmussen told the Frankfurter Rundschau that the surge in Club Med bond yields over recent months “reflects fears about the reversibility of the euro, and thus a currency exchange risk” rather than bad economic policies in struggling states. Mr Asmussen confirmed that purchases may be “unlimited” in scale, a far cry from the half-hearted intervention of the past two years, which failed to stem capital flight. The Daily Telegraph can confirm reports in Der Spiegel that ECB technicians are examining plans to cap Spanish and Italian bond yields, among other options.

Bundesbank Says German Economy May Cool Further in Second Half

By Stefan Riecher

August 20 (Bloomberg) — “The prevailing uncertainty in the euro area could have a more negative impact on economic activity in Germany in the second half of the year,” the Bundesbank said in its monthly report. “However, as long as demand for German products from non euro-area countries remains essentially intact, a reversal of the cyclical trend in Germany is highly unlikely.” Growth in Europe’s largest economy slowed to 0.3 percent in the second quarter from 0.5 percent in the first as demand from euro-area trading partners waned. “In addition to ongoing strong construction activity, the outlook for private consumption remains favorable,” the Bundesbank said.

Spain Home Rents Rise, First Time Since January, Fotocasa Says

August 21 (Bloomberg) — Rental prices for Spanish homes rose 0.8 percent in July from June, recording the first monthly increase since January, real-estate website Fotocasa.es and IESE Business School said in an e-mailed statement.

Average rental prices stood at 7.56 euros ($9.38) per square meter, up from 7.49 euros per square meter in June, according to the statement.

Euro-Area Exports Rose 2.4% in June

Unfortunately this is will also be spun as ‘austerity works’ as they don’t realize exports are real costs and imports as real benefits, meaning this is in fact evidence of deteriorating real terms of trade.

And, of course, globally it’s a 0 sum game as for every export there is an equal import. But while we can’t all net export, we can all attempt to net export with overly tight fiscal/low aggregate demand/high unemployment etc. in a very ugly race to the bottom.

Additionally, a rise in net exports from euro zone domestic policy comes with upward pressure on the currency that continues to the point where there are no net exports.

That’s why the ‘export models’ include the govt building foreign exchange reserves, as it sells its currency vs the currency of the region targeted for exports. Hence the growing hoards of $US reserves by all the nations targeting the US for exports.

However, the euro zone, unlike Germany under the mark, doesn’t do that for ideological reasons. They don’t want to buy $US and build $US reserves and give the appearance that the $US is the ‘reserve currency’ backing the euro. And so instead of sustaining net exports, the euro goes up to the point where there are no net exports. Note that the euro appreciated from about 85 to 160 to the dollar during its first decade before backing off to under 120 due to portfolio shifting from blind fear of oblivion. And during that time the currency movement always kept net exports in check.

This is all why the ECB doing ‘whatever it takes’ which means conditional funding to sustain solvency while keeping fiscal ‘overly tight’ is extremely euro friendly.

Euro-Area Exports Rose 2.4% in June, Led by Germany: Economy

By Simone Meier

August 17 (Bloomberg) — Euro-area exports rose for a second month in June, driven by a surge in shipments from Germany, as companies tapped into emerging markets to offset declining demand at home.\

Exports from the 17-nation currency bloc advanced a seasonally adjusted 2.4 percent from May, when they gained 0.4 percent, the European Union’s statistics office in Luxembourg said today. Imports stagnated in the period and the trade surplus widened to 10.5 billion euros ($13 billion) from 6.8 billion euros.

Europe’s economy contracted 0.2 percent in the second quarter as tougher austerity measures pushed at least six member states including Italy and Spain into recession. With households and companies across the region cutting spending, exporters such as L’Oreal SA, the world’s largest cosmetics maker, have relied on faster-growing Asian markets to bolster sales.

“The euro-region economy is undergoing a mild recession,” said Alexander Krueger, chief economist at Bankhaus Lampe KG in Dusseldorf. “The global growth dynamic has eased somewhat, but exports will continue to support development to a certain extent in the second half of the year.”

German exports jumped 6.6 percent in June to 40.9 billion euros, while imports in Europe’s largest economy rose 1.5 percent. Shipments from Italy increased 2 percent in the period.
France and Spain reported gains of 1 percent and 1.4 percent, respectively.