Labor force participation rate, 1978-now:

Like talking about how good the person looked at his funeral?

Karim writes:

Chart below shows the recent divergence in Conference Board confidence surveys for Canada (blue) and U.S. (red).

Rising Deficits Pose Major Threat to Economy: Bernanke

By Jeff Cox

Feb 2 (CNBC) — Rising federal budget deficits are posing a significant threat to the U.S. economy and are likely to cause a crisis if not brought under control, Federal Reserve Chairman Ben Bernanke told Congress Thursday.

Calling the situation “unsustainable,” the central bank leader pointed out that surging health-care costs, along with the high level of government spending used to pull the economy out of recession, are creating fiscal hazard.

“Having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences,” Bernanke told the House Budget Committee. “Over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and thus reduce productivity growth.”

At the same time, he also warned Congress not to pull the reins too tightly so as to threaten growth.

Fed’s Low Rates Killing Credit, Slowing Recovery: Gross

By Jeff Cox

Feb 1 (CNBC) — The Federal Reserve’s zero-interest-rate policy is hampering economic recovery by discouraging bank lending, Pimco bond titan Bill Gross said in an analysis.

For banks, a healthy lending environment exists where they can borrow at low rates in the short term and lend at significantly higher rates over the long term, a situation that creates a profit through a positively sloped yield curve

China economy faces downward risks in 2012

Feb 1 (Reuters) — China’s economy faces downward risks in 2012, as weakening external demand cuts into growth of the country’s export sector, the Finance Minister Xie Xuren said in remarks published on Wednesday.

He also said inflationary pressures in China remain strong as international markets are awash with cash, which has helped push up global commodity prices.

“There exists some downward pressure for the economic growth. As the external demand is now fading clearly, Chinese exporters are facing increasing difficulties,” Xie said in an article published in the ruling Communist Party’s mouthpiece magazine, Seeking Truth, which was posted on the central government website, www.gov.cn.

China’s economy, which grew at its weakest pace in 21/2 years in the latest quarter, looks to be heading for an even sharper slowdown in coming months, although an official survey of purchasing managers showed a slight upturn in factory production in January.

Xie also emphasized the important role of fiscal policy in maintaining China’s steady and relatively fast economic growth and said Beijing would continue to implement a proactive fiscal policy this year.

China’s fiscal deficit and government debt ratio, both of which remain within a safe and comfortable zone, are expected to give much scope for the government to keep its proactive fiscal policy, Xie added.

China’s nationwide fiscal revenues jumped 25.8 percent to a record high of 10.37 trillion yuan in 2011, leaving the country with a fiscal deficit of 519 billion yuan, lower than the budgeted 900 billion yuan.

“It is necessary and also possible for us to continue to implement a proactive fiscal policy,” he said. Xie also said that his ministry would provide more fiscal support to small to mediumsized enterprises and step up efforts to cut taxes for some selected sectors to restructure the economy away from exports and towards domestic consumption. “We will further improve tax cut policies in some areas to promote the development of enterprises and boost household consumption,” he added. Beijing has unveiled a slew of tax breaks to help cashstrapped small firms cope with rising costs and has also allowed them to issue more bonds and tap other sources of financing to ease the funding squeeze. The finance ministry also vowed to guarantee enough funding for key construction projects in the 12th five year plan period. Chinese Premier Wen Jiabao also said at a state council meeting on Tuesday that the central government would back funding to major projects already under way to ensure steady growth in investments.

China 2012 Budget Deficit May Rise Slightly

Feb 1 (Bloomberg) — China’s budget deficit may rise slightly or be almost unchanged this year from 2011, Gao Peiyong, a researcher with the Chinese Academy of Social Sciences, wrote in a commentary in today’s People’s Daily.

China may control fiscal expansion this year as maintaining consumer prices is a main problem for the country, Gao wrote

China may cut tax, rather than increase spending to continue conducting positive fiscal policies, according to Gao.

2012 Economic Fundamentals Remain Sound

Feb 1 (Bloomberg) — China’s economic fundamentals remain sound and the country has some advantages that will promote development this year, Finance Minister Xie Xuren wrote in Qiushi article posted on the central government’s website today.

China has “huge” domestic demand potential, Xie writes

China still faces downward pressure on economic growth, “relatively large” inflationary pressure and potential economic and financial risks, Xie writes

China’s deficit rate and debt rate are in a “safe range,” Xie writes

China Says it Will Implement Proactive Fiscal Policy This Year

Feb 1 (Yonhap) — China said Wednesday it will implement a proactive fiscal policy this year in a bid to drive up growth amid growing signs of a global economic slump.

Chinese Minister of Finance Xie Xuren, said in a statement that the government will use financial functions to maintain stable and rapid economic development in China.

China’s economic growth slowed last year, with its gross domestic product growing 8.9 percent on-year in the fourth quarter, slowing from 9.1 percent in the third quarter and 9.5 percent in the second quarter.

Over the course of the year, China’s economy expanded 9.2 percent in 2011 from a year earlier, down from 10.3 percent on-year growth in 2010.

Xie noted that China’s economy is facing downward pressure stemming from external shocks.

“The country’s exports are facing increasing difficulties, affected by significantly weakening external demand,” he said. “New drivers for economic growth need to be developed.”

The country’s export growth has begun slowing on falling global trade.

With global economic uncertainty lingering, including the European fiscal crisis, China has been looking to transform itself into a consumption-oriented economy by raising domestic demand.

Japan’s Fin Min Azumi To Take Decisive Forex Steps If Needed

Jan 25 (Dow Jones) — Japan’s finance minister issued a fresh warning Tuesday that he will take “decisive steps” if speculators push the yen up too sharply, after the Japanese currency rose to its strongest level in around three months overnight.

“There is no change in my stance” on foreign exchange issues, Jun Azumi said at a news conference after a regular Cabinet meeting. “If there is excessive volatility or really speculative movement, I will be vigilant against it, and I will take decisive steps if necessary.”
The phrase “decisive steps” is a Japanese code for currency-market intervention.

But Azumi added that Japan’s economy “isn’t necessarily in a bad shape.” He voiced hopes that Europe’s debt crisis would ease, helping Japanese stock markets stabilize.

The yen briefly surged to Y76.21 Monday, as investors fleeing Europe’s debt crisis took shelter in Japan’s currency despite warnings from Japanese policymakers that yen strength was unwarranted.

Barry Armstrong Show

Bank liquidity is something like wheels on a car.
Without wheels the car won’t function, but neither are wheels alone enough to make it go.

Banks are public/private partnerships, with govt’s role being liquidity provider, as private capital in the first loss position prices risk. And with unlimited liquidity provision comes the necessity of full regulation and supervision of the asset/capital side.

In the US the unlimited liquidity provision comes mainly via FDIC insured deposits, supplemented by funding from the Fed. The Fed is the liquidity provider of last resort for its member banks, while at the same time it uses the banking system’s cost of funds as its instrument of monetary policy.

The euro zone hasn’t figured this out yet.
The liquidity provider of last resort is the ECB, as it’s the ‘issuer of the currency’, and as such not itself liquidity constrained. The member nations are like the US states, and are necessarily liquidity constrained, and therefore not ‘empowered’ to be liquidity providers of last resort to their member banks.

So in that sense, as the bank funding by the ECB grows, it’s all gravitating towards what all other nations have in place. The problem is the euro zone leaders don’t understand that aspect of banking, as evidenced by the way they are resisting the shift to ECB funding, and, in fact, working towards moving banks away from ECB funding.

Draghi Sees No Evidence ECB Loans Are Financing Economy Yet

By Jana Randow and Simone Meier

Jan 28 (Bloomberg) — “Do we know that actually this money is going to finance the real economy? We don’t have evidence of this kind yet,” ECB President Mario Draghi told Davos. “There is a lag. We will have to see.” “We know for sure we have avoided a major, major credit crunch, a major funding crisis,” he said today. “You have parts of the euro area where credit is more or less normal, but you have other parts where credit is seriously contracting.” “If you take 0.5 trillion euros and then you take off the reimbursement of other short-term facilities by the banking system in December, you get a figure of roughly 220 billion euros, which is exactly the amount of bank bonds that were to come due in this period of time,” he said.

EU Leaders to Agree on Rescue Fund, Balanced Budget

Jan 29 (Reuters) — European Union leaders will sign off on a permanent rescue fund for the euro zone at a summit on Monday and are expected to agree on a balanced budget rule in national legislation, with unresolved problems in Greece casting a shadow on the discussions.

The summit – the 17th in two years as the EU battles to resolve its sovereign debt problems – is supposed to focus on creating jobs and growth, with leaders looking to shift the narrative away from politically unpopular budget austerity. The summit is expected to announce that up to 20 billion euros of unused funds from the EU’s 2007-2013 budget will be redirected towards job creation, especially among the young, and will commit to freeing up bank lending to small- and medium-sized companies.

But discussions over the permanent rescue fund, a new ‘fiscal treaty’ and Greece will dominate the talks.

Negotiations between the Greek government and private bondholders over the restructuring of 200 billion euros of Greek debt made progress over the weekend, but are not expected to conclude before the summit begins.

Until there is a deal between Greece and its private bondholders, EU leaders cannot move forward with a second, 130 billion euro rescue program for Athens, which they originally agreed to at a summit last October.

Instead, they will sign a treaty creating the European Stability Mechanism (ESM), a 500 billion-euro permanent bailout fund that is due to become operational in July, a year earlier than first planned. And they are likely to agree the terms of a ‘fiscal treaty’ tightening budget rules for those that sign up.

The ESM will replace the European Financial Stability Facility (EFSF), a temporary fund that has been used to bail out Ireland and Portugal and will help in the second Greek package.

Leaders hope the ESM will boost defenses against the debt crisis, but many – including Italian premier Mario Monti, IMF chief Christine Lagarde and U.S. Treasury Secretary Timothy Geithner – say it will only do so if its resources are combined with what remains in the EFSF, creating a super-fund of 750 billion euros ($1 trillion).

The International Monetary Fund says an agreement to increase the size of the euro zone ‘firewall’ will convince others to contribute more resources to the IMF, boosting its crisis-fighting abilities and improving market sentiment.

But Germany is opposed to such a step.

Chancellor Angela Merkel has said she will not discuss the issue of the ESM/EFSF’s ceiling until leaders meet for their next summit in March. In the meantime, financial markets will continue to fret that there may not be sufficient rescue funds available to help the likes of Italy and Spain if they run into renewed debt funding problems.

“There are certainly signals that Germany is willing to consider it and it is rather geared towards March from the German side,” a senior euro zone official said.

The sticking point is German public opinion which is tired of bailing out the euro zone’s financially less prudent. Instead, Merkel wants to see the EU – except Britain, which has rejected any such move – sign up to the fiscal treaty, including a balanced budget rule written into constitutions. Once that is done, the discussion about a bigger rescue fund can take place.