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> (email exchange)
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> Attached is an interesting article from the FT discussing the investment slowdown in China.
> While the official picture remains one of a gradual slowdown, more anecdotal data on
> electricity production and bank loans suggests that the slowdown is much more severe – this
> is likely to negatively impact the EM and the Asian suppliers to China such as Australia and
> Korea.
>
Full article: China Investment Boom Starts to Unravel
51% Predict U.S. Government Will Go Bankrupt Before Budget Is Balanced
Just over half of U.S. voters are still skeptical that their elected officials will get the federal budget under control before it’s too late.
A new Rasmussen Reports national telephone survey finds that 51% of Likely Voters believe the federal government will go bankrupt and be unable to pay its debt before the federal budget is balanced. Thirty-six percent (36%) disagree and think it’s more likely that the federal budget will be balanced first. Thirteen percent (13%) are not sure. (To see survey question wording, click here.)
Venice video link here.
Also, Trichet Friday, the German elections, and G8 reports seem to be setting the tone for the euro zone to do something about the solvency issue. This is very good for equities and the rest of the credit stack.
At the same time it does not seem likely that any growth proposals will include fiscal relaxation, so the euro zone will have to get by the best it can with the deficits it has, which I’d guess should mean flat GDP, +/- 1% or so.
The US should also continue to muddle through with modest top line growth, and inflation low enough and the output gap wide enough to keep this Fed from hiking any time soon.
Not much of a plan, but note that it now makes ECB centric proposals respectable.
This is serious progress:
Ex-ECB Chief Trichet Unveils Bold Plan to Save Euro
May 17 (Reuters) — Europe could strengthen its monetary union by giving European politicians the power to declare a sovereign state bankrupt and take over its fiscal policy, the former head of the European Central Bank said on Thursday in unveiling a bold proposal to salvage the euro.
The plan offered by Jean-Claude Trichet, who stepped down last November as ECB president, would address a fundamental weakness of the 13-year-old single currency, the survival of which is threatened by the Greek crisis.
The monetary union has always defied economic principles, because the euro was launched ahead of European fiscal or political union. This has caused strains for countries running huge budget deficits – namely Greece, Portugal, Ireland, Spain and Italy – that have led to financing difficulties and over-stretched banking systems.
For the European Union, a fully fledged United States of Europe where nation states cede a large chunk of fiscal authority to the federal government appears politically unpalatable, Trichet said.
An alternative is to activate the EU federal powers only in exceptional circumstances when a country’s budgetary policies threaten the broader monetary union, he said.
“Federation by exception seems to me not only necessary to make sure we have a solid Economic and Monetary Union, but it might also fit with the very nature of Europe in the long run. I don’t think we will have a big (centralized) EU budget,” Trichet said in a speech before the Peterson Institute of International Economics here.
“It is a quantum leap of governance, which I trust is necessary for the next step of European integration,” he said.
His proposal was presented in Washington on the eve of the G8 meeting of the world’s major economies, hosted by U.S. President Barack Obama who will press Europe to intensify its efforts to resolve the sovereign debt crisis, which threatens a fragile global recovery.
It also comes ahead of a critical meeting of EU leaders on May 23 to discuss ways to support growth. Its strict budgetary policies to date have led to recessions in many countries, political unrest and in Greece a political stalemate after recent elections.
Trichet said the building blocks already are in place for moving ahead with his fiscal plan.
Countries have agreed to surveillance of each other’s budgets and they have agreed to levy fines on countries that run excessive budget deficits, giving them fiscal oversight authority.
The next step would be to take a country into receivership when its political leaders or its parliament cannot implement sound budgetary policies approved by the EU. The action would have democratic accountability if it were approved by the European Council of EU heads of states and the elected European Parliament, he said.
The idea earned a warm reception from leading economists and prominent Europeans attending the session.
“It is a very radical proposal, couched as a modest step,” said Richard Cooper, international economist at Harvard.
Caio Koch Weser, former German economics minister, said he found it “very attractive” because it addresses the problem of a strong European Central Bank, a weak European Commission which acts as the EU’s executive branch, and a confused European Council, which provides political leadership.
Nick Hanauer on consumers:
I can say with confidence that rich people don’t create jobs, nor do businesses, large or small. What does lead to more employment is a “circle of life” like feedback loop between customers and businesses. And only consumers can set in motion this virtuous cycle of increasing demand and hiring. In this sense, an ordinary middle-class consumer is far more of a job creator than a capitalist like me.
So when businesspeople take credit for creating jobs, it’s a little like squirrels taking credit for creating evolution. In fact, it’s the other way around.
Anyone who’s ever run a business knows that hiring more people is a capitalists course of last resort, something we do only when increasing customer demand requires it. In this sense, calling ourselves job creators isn’t just inaccurate, it’s disingenuous.
That’s why our current policies are so upside down. When you have a tax system in which most of the exemptions and the lowest rates benefit the richest, all in the name of job creation, all that happens is that the rich get richer.
US economy muddling through, growing modestly, particularly given the output gap, but growing nonetheless.
Lower crude prices should also help some.
I had guessed the Saudis would hold prices at the $120 Brent level, given their output of just over 10 million bpd showed strong demand
and their capacity to increase to their stated 12.5 million bpd capacity remains suspect. And so with the Seaway pipeline now open (last I heard)
to take crude from Cushing to Brent priced markets I’d guessed WTI would trade up to Brent.
But what has happened is the Saudi oil minister started making noises about lower prices and when ‘market prices’ started selling off the Saudis ‘followed’ by lowering their posted prices, sustaining the myth that they are ‘price takers’ when in reality they are price setters.
So to date, contrary to my prior guess, both wti and brent have sold off quite a bit, and cheaper imported crude is a plus for the US economy. Which is also a plus for the $US, as a lower import bill makes $US ‘harder to get’ for foreigners.
But the trade for quite a while has been strong dollar = weak US stocks due to export pricing/foreign earnings translations, and also because US stocks have weakened on signs of euro zone stress, which has been associated with a weaker euro. So when things seem to be looking up for the euro zone, the euro tends to go up vs the dollar, with US stocks doing better with any sign of ‘improvement’ in the euro zone.
It’s all a tangled case of cross currents, which makes forecasting anything particularly difficult.
Not to mention possible dislocations from the whale, which may or may not have run their course, etc.
And then there’s the news from Greece.
First, they made a full bond payment yesterday of nearly 500 million euro to bond holders who did not accept the PSI discounts. This is confounding for the obvious reasons, signals it sends, moral hazard, credibility, etc. etc. But it’s also a sign the politicians are doing what they think it takes to keep the euro going as the currency of the euro zone. Same goes for the decision to fund Greece as per prior agreements even when there is no Greek govt to talk to, and lots of signs any new govt may not honor the arrangements.
Even if that means tricking private investors out of 100 billion, rewarding those who defy them, whatever. Tactics may be continuously reaching new lows but all for the end of keeping the euro as the single currency.
It also means that while, for example, 10 year Spanish yields may go up or down, the intention is for Spain, one way or another, to fund itself, even if short term. Doesn’t matter.
And more EFSF type discussions. The plan may be to start using those types of funds as needed, keeping the ECB out of it for that much longer, regardless of where longer term bonds happen to trade.
As for the euro zone economy, yes, growth is probably negative, but if they hold off on further fiscal adjustments, the 6%+ deficit they currently are running for the region is probably, at this point, enough to muddle through around the 0 growth neighborhood. The upside isn’t much from there, as with limited private sector credit growth opportunities, and substantial net export growth unlikely, and strong ‘automatic stabilizers’ any growth could be limited by those automatic fiscal stabilizers. Not to mention that this type of optimistic scenario likely strengthens the euro and keeps a lid on net exports as well.
And sad that this ‘bullish scenario’ for the euro zone means their massive output gap doesn’t even begin to close any time soon.
For the US, this bullish scenario has similar limitations, but not quite as severe, so the output gap could start to narrow some and employment as a percentage of the population begin to improve. But only modestly.
The US fiscal cliff is for real, but still far enough away to not be a day to day factor. And it at least does show that fiscal policy does work, at least according to every known forecaster with any credibility, which might open the door to proactive fiscal? Note the increasing chatter about how deficits don’t seem to drive up interest rates? And the increasing chatter about how the US, Japan, UK, etc. aren’t like the euro zone members with regards to interest rates?
Same in the euro zone, where discussion is now common regarding how austerity doesn’t work to grow their economies, with the reason to maintain it now down to the need to restore solvency. This is beginning to mean that if they solved the solvency riddle some other way they might back off on the austerity. And now there is a political imperative to do just that, so things could move in that direction, meaning ECB support for member nation funding, directly or indirectly, which removes the ‘ponzi’ aspect.
Not even a passing mainstream thought to look at currency users like France, Spain, Italy, California, and Illinois, that are facing severe market discipline via solvency/interest rate risk any differently from currency issuers like the UK, US, Japan, and Denmark where those types of market forces remain stubbornly inapplicable.
One would think something so obvious and ‘in their face’ year after year, decade after decade, might get their attention…
Hollande faces budget shortfall test
(FT) François Hollande has promised that he would take whatever measures necessary to rein in France’s heavy public debt, which is rising close to 90 per cent of gross domestic product. He knows that to win backing for his growth initiative from German chancellor Angela Merkel depends on assuring her that France will meet its obligations on its own public finances. The European Commission’s forecast projected a budget deficit next year of 4.2 per cent, compared to the target of 3 per cent set by Brussels and to which Mr Hollande is committed. That amounts to a gap of some €24bn. Mr Hollande is unlikely to give further details of his plans until he gets an independent report on the public finances at the end of June (after National Assembly elections).
Dutch austerity consensus unravels
(FT) Freedom party leader Geert Wilders brought down the country’s ruling coalition last month when he pulled out of talks over budget cuts needed to meet strict EU deficit limits, triggering elections scheduled for September 12. Mr Wilders is campaigning fiercely against what he calls the government’s “subservience” to Brussels’ demands for budget cuts. A poll released on Monday suggests voters are turning against the last-minute budget deal reached after the government fell between the ruling liberals and centre-left opposition parties. The April 26 deal pledged the Netherlands to meet an EU deadline to slash its 2013 budget deficit to below 3 per cent of gross domestic product, down from a projected 4.7 per cent.
Mosler Squad Win Much Interrupted BEC Snetterton Race
By James Broomhead
