Category Archives: Credit

Credit spillovers from Eur banks to EM

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Makes sense.

I always wondered how that loan demand was accommodated.
Never looked like the kind of lending US regulators would sanction.


Karim writes:

Interesting table from JPM.
Much larger dependence on credit from Eur banks for LATAM economies than from U.S. banks.
Poland/Russia not as surprising but still large!
Overall, domestic bank lending surveys in EM have also been moving towards a net tightening of lending standards.

Could be more severe credit contraction in those economies as a result of ongoing strains in Europe.

Euro area and US bank claims on EM
As of 2Q11
EUR Banks
US Banks
$ bn
% of dom cred
$ bn
% of dom cred
EM
1980.7
12.4
811.3
5.1
EM Asia
406.7
3.2
472.0
3.8
China
90.6
1.0
81.7
0.9
Korea
68.4
6.3
95.1
8.8
Latam
618.1
38.7
248.5
15.6
Brazil
285.0
23.1
97.6
7.9
Russia
113.5
16.1
23.8
3.4
Poland
249.0
95.6
14.4
5.5


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MMT to Obama- Use This Speech!

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This is the speech I would make if I were President Obama:

My fellow Americans, let me get right to the point.

I have three bold new proposals to get back all the jobs we lost, and then some.
In fact, we need at least 20 million new jobs to restore our lost prosperity and put America back on top.

First let me state that the reason private sector jobs are lost is always the same.
Jobs are lost when business sales go down.
Economists give that fancy words- they call it a lack of aggregate demand.

But it’s very simple.
A restaurant doesn’t lay anyone off when it’s full of paying customers,
no matter how much the owner might hate the government,
the paper work, and the health regulations.

A department store doesn’t lay off workers when it’s full of paying customers,
And an engineering firm doesn’t lay anyone off when it has a backlog of orders.

Restaurants and other businesses lay people off when their customers stop buying, for any reason. So the reason we lost 8 million jobs almost all at once back in 2008 wasn’t because all of a sudden all those people decided they’d rather collect unemployment than work.
The reason all those jobs were lost was because sales collapsed.
Car sales, for example, collapsed from a rate of almost 17 million cars a year to just over 9 million cars a year.
That’s a serious collapse that cost millions of jobs.

Let me repeat, and it’s very simple, when sales go down, jobs are lost,
and when sales go up, jobs go up, as business hires to service all their new customers.

So my three proposals are specifically designed to get sales up to make sure business has a good paying job for anyone willing and able to work.

That’s good for businesses and all the people who work for them.

And these proposals are bipartisan.
They are supported by Americans ranging from Tea Party supporters to the Progressive left, and everyone in between.

So listen up!

My first proposal if for a full payroll tax suspension.
That means no FICA taxes will be taken from both employees and employers.

These taxes are punishing, regressive taxes that no progressive should ever support.
And, of course, the Tea Party is against any tax.
So I expect full bipartisan support on this proposal.

Suspending these taxes adds hundreds of dollars a month to the incomes of people working for a living. This is big money, not just a few pennies as in previous measures.

These are the people doing the real work.
Allowing them to take home more of their pay supports their good efforts.
Right now take home pay is barely enough to pay for food, rent, and gasoline, with not much left over. When government stops taking FICA taxes out of their pockets, they’ll be able to get back to more normal levels of spending.

And many will be able to better make their mortgage payments and their car payments,
which, by the way, is what the banks really want- people who can make their payments.
That’s the bottom up way to fix the banks, and not the top down bailouts we’ve done in the past.

And the payroll tax holiday is also for business, which reduces costs for business, which, through competition, helps keep prices down for all of us. Which means our dollars buy more than otherwise.

So a full payroll tax holiday means more take home pay for people working for a living,
and lower costs for business to help keep prices and inflation down,
so sales can go up and we can finally create those 20 million private sector jobs we desperately need.

My second proposal is for a one time $150 billion Federal revenue distribution to the 50 state governments with no strings attached.
This will help the states to fill the financial hole created by the recession,
and stay afloat while the sales and jobs recovery spurred by the payroll tax holiday
restores their lost revenues.

Again, I expect bipartisan support.
The progressives will support this as it helps the states sustain essential services,
and the Tea Party believes money is better spent at the state level than the federal level.

My third proposal does not involve a lot of money, but it’s critical for the kind of recovery that fits our common vision of America.
My third proposal is for a federally funded $8/hr transition job for anyone willing and able to work, to help the transition from unemployment to private sector employment.

The problem is employers don’t like to hire the unemployed, and especially the long term unemployed. While at the same time, with the payroll tax holiday and the revenue distribution to the states,business is going to need to hire all the people it can get. The federally funded transition job allows the unemployed to get a transition job, and show that they are willing and able to go to work every day, which makes them good candidates for graduation to private sector employment.

Again, I expect this proposal to also get solid bipartisan support.
Progressives have always known the value of full employment,
while the Tea Party believes people should be able to work for a living, rather than collect unemployment.

Let me add here that nothing in these proposals expands the role or scope of the federal government.
The payroll tax holiday is a cut of a regressive, punishing tax,
that takes the government’s hand out of the pockets of both workers and business.

The revenue distribution to the states has no strings attached.
The federal government does nothing more than write a check.

And the transition job is designed to move the unemployed, who are in fact already in the public sector, to private sector jobs.

There is no question that these three proposals will drive the increase in sales we need to
usher in a new era of prosperity and full employment.

The remaining concern is the federal budget deficit.

Fortunately, with the bad news of the downgrade of US Treasury securities by Standard and Poors to AA+ from AAA, a very important lesson was learned.

Interest rates actually came down. And substantially.

And with that the financial and economic heavy weights from the 4 corners of the globe
made a very important point.

The markets are telling us something we should have known all along.
The US is not Greece for a very important reason that has been overlooked.
That reason is, the US federal government is the issuer of its own currency, the US dollar.
While Greece is not the issuer of the euro.

In fact, Greece, and all the other euro nations, have put themselves in the position of the US states. Like the US states, Greece and other euro nations are not the issuer of the currency that they spend. So they can run out of money and go broke, and are dependent on being able to tax and borrow to be able to spend.

But the issuer of its own currency, like the US, Japan, and the UK,
can always pay their bills.
There is no such thing as the US running out of dollars.
The US is not dependent on taxes or borrowing to be able to make all of its dollar payments.
The US federal government can not go broke like Greece.

That was the important lesson of the S&P downgrade,
and everyone has seen it up close and personal and they all now agree.
And now they all know why, with the deficit at record high levels, interest rates remain at record low levels.

Does that mean we should spend without limit and not tax at all?
Absolutely not!
Too much spending and not enough taxing will surely drive up prices and inflation.

But it does mean that right now,
with unemployment sky high and an economy on the verge of another recession,
we can immediately enact my 3 proposals to bring us back to
a strong economy with good jobs for people who want them.

And some day, if somehow there are too many jobs and it’s causing an inflation problem,
we can then take the measures needed to cool things down.

But meanwhile, as they say, to get out of hole we need to stop digging,
and instead implement my 3 proposals.

So in conclusion, let me repeat these three, simple, direct, bipartisan proposals
for a speedy recovery:

A full payroll tax holiday for employees and employers
A one time revenue distribution to the states
And an $8/hr transition job for anyone willing and able to work to facilitate
the transition from unemployment to private sector employment as the economy recovers.

Thank you.

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Consumer credit up, Friday update

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It doesn’t look to me like anything particularly bad has actually yet happened to the US economy.

The federal deficit is chugging along at maybe 9% of US GDP, supporting income and adding to savings by exactly that much, so a collapse in aggregate demand, while not impossible, is highly unlikely.

After recent downward revisions, that sent shock waves through the markets, so far this year GDP has grown by .4% in Q1 and 1.2% in Q2, with Q3 now revised down to maybe 2.0%. Looks to me like it’s been increasing, albeit very slowly. And today’s employment report shows much the same- modest improvement in an economy that’s growing enough to add a few jobs, but not enough to keep up with productivity growth and labor force growth, as labor participation rates fell to a new low for the cycle.

And, as previously discussed, looks to me like H1 demonstrated that corps can make decent returns with very little GDP growth, so even modestly better Q3 GDP can mean modestly better corp profits. Not to mention the high unemployment and decent productivity gains keeping unit labor costs low.

Lower crude oil and gasoline profits will hurt some corps, but should help others more than that, as consumers have more to spend on other things, and the corps with lower profits won’t cut their actual spending and so won’t reduce aggregate demand.

This is the reverse of what happened in the recent run up of gasoline prices.

Japan should be doing better as well as they recover from the shock of the earthquake.

Yes, there are risks, like the looming US govt spending cuts to be debated in November, but that’s too far in advance for today’s markets to discount.

A China hard landing will bring commodity prices down further, hurting some stocks but, again, helping consumers.

A euro zone meltdown would be an extreme negative, but, once again, the ECB has offered to write the check which, operationally, they can do without limit as needed. So markets will likely assume they will write the check and act accordingly.

A strong dollar is more a risk to valuations than to employment and output, and falling import prices are very dollar friendly, as is continuing a fiscal balance that constrains aggregate demand to the extent evidenced by the unemployment and labor force participation rates. And Japan’s dollar buying is a sign of the times. With US demand weakening, foreign nations are swayed by politically influential exporters who do not want to let their currency appreciate and risk losing market share.

The Fed’s reaction function includes unemployment and prices, but not corporate earnings per se. It’s failing on it’s unemployment mandate, and now with commodity prices coming down it’s undoubtedly reconcerned about failing on it’s price stability mandate as well, particularly with a Fed chairman who sees the risks as asymmetrical. That is, he believes they can deal with inflation, but that deflation is more problematic.

So with equity prices a function of earnings and not a function of GDP per se, as well as function of interest rates, current PE’s look a lot more attractive than they did before the sell off, and nothing bad has happened to Q3 earnings forecasts, where real GDP remains forecast higher than Q2.

So from here, seems to me both bonds and stocks could do ok, as a consequence of weak but positive GDP that’s enough to support corporate earnings growth, but not nearly enough to threaten Fed hikes.

Consumer borrowing up in June by most in 4 years

By Martin Crutsinger

May 25 (Bloomberg) — Americans borrowed more money in June than during any other month in nearly four years, relying on credit cards and loans to help get through a difficult economic stretch.

The Federal Reserve said Friday that consumers increased their borrowing by $15.5 billion in June. That’s the largest one-month gain since August 2007. And it is three times the amount that consumers borrowed in May.

The category that measures credit card use increased by $5.2 billion — the most for a single month since March 2008 and only the third gain since the financial crisis. A category that includes auto loans rose by $10.3 billion, the most since February.

Total consumer borrowing rose to a seasonally adjusted annual level of $2.45 trillion. That was 2.1 percent higher than the nearly four-year low of $2.39 trillion hit in September.

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post debt ceiling crisis update

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With the debt ceiling extended, the risk of an catastrophic automatic pro cyclical Treasury response, as previously discussed, has been removed.

What’s left is the muddling through with modest topline growth scenario we’ve had all year.

With a 9% budget deficit humming along, much like a year ago when markets began to discount a double dip recession, I see little chance of a serious collapse in aggregate demand from current levels.

It still looks to me like a Japan like lingering soft spot and L shaped ‘recovery’ with the Fed struggling to meet either of its mandates will keep this Fed ‘low for long’, and that the term structure of rates is moving towards that scenario.

With the end of QE, relative supply shifts back to the curve inside of 10 years, which should work to flatten the long end vs the 7-10 year maturities. And the reversal of positions related to hedging debt ceiling risks that drove accounts to sell or get short the long end work to that same end as well.

The first half of this year demonstrated that corporate sales and earnings can grow at reasonable rates with modest GDP growth. That is, equities can do reasonably well in a slow growth, high unemployment environment.

However, a new realization has finally dawned on investors and the mainstream media. They now seem to realize that government spending cuts reduce growth, with no clarity on how that might translate into higher future private sector growth. That puts the macroeconomic picture in a bind. The believe we need deficit reduction to ward off a looming financial crisis where we somehow turn into Greece, but at the same time now realize that austerity means a weaker economy, at least for as far into the future as markets can discount. This has cast a general malaise that’s been most recently causing stocks and interest rates to fall.

With crude oil and product prices leveling off, presumably because of not so strong world demand, the outlook for inflation (as generally defined) has moderated, as confirmed by recent indicators. As Chairman Bernanke has stated, commodity prices don’t need to actually fall for inflation to come down, they only need to level off, providing they aren’t entirely passed through to the other components of inflation. And with wages and unit labor costs, the largest component of costs, flat to falling, it looks like the the higher commodity costs have been limited to a relative value shift. Yes, standards of living and real terms of trade have been reduced, but it doesn’t look like there’s been any actual inflation, as defined by a continuous increase in the price level.

However, the market seem to have forgotten that the US has been supplying crude oil from its strategic petroleum reserves, which will soon run its course, and I’ve yet to see indications that Lybia will be back on line anytime soon to replace that lost supply. So it is possible crude prices could run back up in September and inflation resume. For the other commodities, however, the longer term supply cycle could be turning, where supply catches up to demand, and prices fall towards marginal costs of production. But that’s a hard call to make, until after it happens.

With the debt ceiling risks now behind us, the systemic risk in the euro zone is now back in the headlines. Unlike the US, where the Treasury is back to being counter cyclical (unemployment payments can rise should jobs be lost and tax revenues fall), the euro zone governments remain largely pro cyclical, as market forces demand deficits be cut in exchange for funding, even as economies weaken. This means a slowdown to that results in negative growth and rising unemployment can accelerate downward, at least until the ECB writes the check to fund counter cyclical deficit spending.

China had a relatively slow first half, and the early indicators for the second half are mixed. Manufacturing indicators looked weak, while the service sector seemed ok. But it’s both too early to tell and the numbers can’t be trusted, so the possibility of a hard landing remains.

Japan is recovering some from the earthquake, but not as quickly as expected, and there has yet to be a fiscal response large enough to move that needle. And with global excess capacity taking up some of the fall off in production, Japan will be hard pressed to get it back.

Falling crude prices and weak global demand softening other commodity prices, looks dollar friendly to me. And, technically, my guess is that first QE and then the debt ceiling threats drove portfolios out of the dollar and left the world short dollars, which is also now a positive for the dollar.

The lingering question is how US aggregate demand can be this weak with the Federal deficit running at about 9% of GDP. That is, what are the demand leakages that the deficit has only partially offset. We have the usual pension fund contributions, and corporate reserves are up with retained earnings/cash reserves up. Additionally, we aren’t getting the usual private sector borrowing to spend on housing/cars as might be expected this far into a recovery, even though the federal deficit spending has restored savings of dollar financial assets and debt to income ratio to levels that have supported vigorous private sector credit expansions in past cycles.

Or have they? Looking back at past cycles it seems the support from private sector credit expansions that ‘shouldn’t have happened’ has been overlooked, raising the question of whether what we have now is the norm in the absence of an ‘unsustainable bubble.’ For example, would output and employment have recovered in the last cycle without the expansion phase of sub prime fiasco? What would the late 1990’s have looked like without the funding of the impossible business plans of the .com and y2k credit expansion? And I credit much of the magic of the Reagan years to the expansion phase of what became the S and L debacle, and it was the emerging market lending boom that drove the prior decade. And note that Japan has not repeated the mistake of allowing the type of credit boom they had in the 1980’s, accounting for the last two decades of no growth, and, conversely, China’s boom has been almost entirely driven by loans from state owned banks with no concern about repayment.

So my point is, maybe, at least over the last few decades, we’ve always needed larger budget deficits than imagined to sustain full employment via something other than an unsustainable private sector credit boom? And with today’s politics, the odds of pursuing a higher deficit are about as remote as a meaningful private sector credit boom.

So muddling through seems here to stay for a while.

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S and P backsliding

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“What we mean by credible is something that we think people are actually going to do,” David T. Beers, managing director of sovereign and public finance ratings, said in a recent interview.

David knows the difference between willingness to pay and ability to pay, as per prior discussion.
Here he’s implying there is an issue with ability to pay, which makes him part of the problem and not part of the answer.

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Consumer Borrowing Rises $5.1 billion

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Down a bit from April, but the larger question is whether higher gasoline prices led to more borrowing to buy what previously was bought from income.

Yes, savings is growing, but that is mainly in the form of reduced and unwanted private sector debt, and not dollars in savings accounts.

Consumer Borrowing Rises for Eighth Straight Month

July 8 (AP) — Americans borrowed more in May for the eighth straight month and used their credit cards more for only the second time in nearly three years.

The Federal Reserve says consumer borrowing rose $5.1 billion following a revised gain of $5.7 billion in April. Borrowing in the category that covers credit cards increased, as did borrowing in the category for auto and student loans.

The increase in credit card borrowing marked only the second monthly gain since August 2008. Since the financial crisis, consumers have been cutting back on the use of credit cards, which has depressed economic growth because it has held back consumer spending.

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ISM/Consumer Credit

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Karim writes:

  • Similar to Manufacturing ISM, Non-Mfg activity largely stabilized in June.
  • Most components also stable
  • One notable feature of most PMIs is the collapse of input prices over the last 3mths. Although not a feature of this report, output prices have held largely steady in most surveys-suggesting margins are expanding.
  • Interesting mix of data and anecdotals in article below on progress of U.S. household deleveraging.



June May
Composite 53.3 54.6
Business activity 53.4 53.6
Prices Paid 60.9 69.6
New Orders 53.6 56.8
Backlog of Orders 48.5 55.0
Supplier Deliveries 52.0 54.0
Inventory Change* 53.5 55.0
Employment 54.1 54.0
Export orders* 57.0 57.0
Imports* 46.5 50.5

*=Non-seasonally adjusted

Best Consumer Credit Since ‘06 Reveals Loan Rebound Across U.S.

June 25 (Bloomberg) — Michael Busick says his credit union “was shocked” to discover his credit score was 812 of a possible 850 when he applied for a $19,500 new-car loan.

The loan officer told Busick he rarely sees scores so close to perfect, said the Charlotte, North Carolina, math teacher, who added that he always pays his bills on time and doesn’t “overextend.” He got the funds in May.

The average U.S. credit score — a predictor of the likelihood lenders will be paid back — rose to 696 in May, the highest in at least four years, according to Equifax Inc., a provider of consumer-credit data. The ratio of consumer-debt payments to incomes is the lowest since 1994, and delinquencies have dropped 30 percent in two years, Federal Reserve data show.

Improving credit quality gives households the ability to lift borrowing as concerns ease about rising gasoline prices, hard-to-find jobs and falling home prices. A reacceleration in spending would belie Morgan Stanley economist Stephen Roach’s assertion that consumers will be “zombies” for years because of too much debt.

“The financial situation of the household sector has improved far faster and far more than everyone thought it would two years ago,” said James Paulsen, chief investment strategist for Wells Capital Management in Minneapolis. “People are still locked into the view that consumers are facing record burdens, and they are not. There has been a change that is sustainable and durable.”

Willing to Lend

Bank senior loan officers reported a pickup in demand for auto loans in the second quarter, following first-quarter growth for all consumer lending — the first increase since 2005, according to a quarterly Fed survey released in May. About 29 percent were more willing to make consumer installment loans, the highest percentage since 1994, the survey found.

“The household deleveraging process is much further along than is appreciated,” said Mark Zandi, chief economist at Moody’s Analytics Inc. in West Chester, Pennsylvania. “This is evident in the rapid improvement in credit quality. ‘Zombie consumers’ is a mischaracterization of the state of the American consumer.”

More borrowing could help spur growth slowed by higher gasoline prices, Paulsen said. That will make stocks more attractive than bonds, pushing the Standard & Poor’s 500 Index up about 8 percent to 1,450 by year end, while raising the yield on 10-year Treasury notes more than half a point to 3.75 percent, he said.

Fewer Defaults

Discover Financial Services’ shares have risen about 43 percent this year to $26.55 on July 1. The Riverwoods, Illinois- based credit-card issuer reported a record second-quarter profit of $600 million on June 23, more than double a year earlier, as consumers spent more and defaulted less.

Fewer losses will benefit stocks of other credit-card and banking companies, said senior analyst Brian Foran of Nomura Securities International Inc. in New York, who has a “buy” rating on Discover, Capital One Financial Corp. and U.S. Bancorp, Minnesota’s biggest lender.

Consumers have reduced debt by more than $1 trillion in the 10 quarters ended in March, according to data from the Federal Reserve Bank of New York, and Roach, nonexecutive chairman of Morgan Stanley Asia, says they will retrench “a minimum of another three to five years.” While household obligations are at a 17-year low because of increased savings and lower interest rates since 2007, debt remains high, he said. He calculates that it amounts to 115 percent of income, compared with a 75 percent average from 1970 to 2000.

‘Overly Indebted’

“What I worry about now is we are creating a whole new generation of zombie consumers in the United States,” Roach said in a Bloomberg Television interview with Carol Massar. “We need to encourage balance-sheet repair and adjustment by overly indebted, savings-short consumers.”

Roach’s view is supported by economists who say the credit that fueled the housing boom from 2002 to 2006 will take years to unwind.

“It’s pernicious, it’s ongoing and it’s holding back the growth because people are going to save more and spend less, and this is a process that will last for several years,” said Kevin Logan, chief U.S. economist at HSBC Securities USA Inc. in New York.

Confidence among U.S. consumers rose to a 10-week high for the period ended June 26 as gasoline prices declined, according to Bloomberg’s Consumer Comfort Index. Expectations had soured in the past few months following a 29 percent surge in regular unleaded prices during the past year, according to AAA, the nation’s largest auto club.

Falling Home Values

Unemployment climbed to 9.1 percent in May, the highest this year, figures from the Labor Department showed June 3, while the S&P/Case-Shiller index of property values in 20 cities fell 4 percent from April 2010, the biggest drop since November 2009.

Even so, Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, says the growth in credit reflects an underlying optimism, part of a virtuous cycle. As a Fed economist in 2000, he published research that concluded “high debt burdens are not a negative force” and the debt-income ratio isn’t reliable in predicting spending.

“Stronger credit growth is associated with stronger consumer spending,” Maki said. “When consumer credit is growing, it is a sign that households have become more confident about income prospects.”

Rising Profits

Craig Kennison, a senior analyst at Robert W. Baird & Co. in Milwaukee, predicts lending profits will rise at CarMax Inc., the largest U.S. seller of used cars, and at Milwaukee-based Harley-Davidson Inc., the largest U.S. motorcycle manufacturer.

Their finance arms “have fully recovered,” said Kennison, who rates both “outperform.” CarMax, based in Richmond, Virginia, “is looking to take a larger share of the loan originations at CarMax dealerships, a sign of confidence,” and “Harley-Davidson is poised to see retail growth for the first time in the U.S. since 2006.”

Households spent just 16.4 percent of their earnings on debt payments in the first quarter, including lease and rental payments, homeowners’ insurance and property taxes. That’s the least since 1994, Fed figures show. Since the 18-month recession began in December 2007, household obligations have dropped by 2.37 percent of incomes.

Even consumers still in trouble are in better shape, said Mark Cole, chief operating officer for Atlanta-based CredAbility, which provides nonprofit credit counseling nationally. Clients have an average of $19,500 in unsecured debt this year, down 30 percent from 2009 and the lowest in at least six years. “We really see people’s credit quality is increasing,” he said.

‘Fine’ Cash Flows

Credit-card charge-offs “are collapsing” as companies have written off debt of people unemployed for 27 weeks or longer, who account for about 45 percent of all the jobless, Foran said. “Consumers spend money based on their cash flows, and their cash flows are fine.”

Discover’s rate of 30-day delinquencies was 2.79 percent in the second quarter, the lowest in its 25-year history, company officials said on a June 23 conference call with investors. The nationwide rate fell in May to 3.09 percent, the lowest since May 2007, according to Bloomberg data.

Jennifer Lahotski, 28, who has a marketing job in Los Angeles, said she’s worked to repair her credit from 2007, when it scored “absolutely below 660,” the minimum considered prime for consumer loans, according to Equifax. The Pennsylvania State University alumnus had been late on some bills and had an old charge of $5 from a gym.

‘Sent Them a Check’

“I went through each expense, each delinquency, and sent them a check,” she said. “I turned myself into a hermit for six months but I did it,” she added, eliminating most restaurant meals and “random Target runs where you come out with $50” of merchandise.

Lahotski, who has a Visa and an American Express card and $15,000 in student loans, said she is saving “a few hundred a month,” with plans to buy a house when she can afford a down payment.

Math teacher Busick, 33, who has a home loan and four credit cards, estimates his near-perfect credit score has risen from the upper 700s in the past few years. While he uses an American Express card to accumulate frequent-flier miles on Delta Air Lines Inc., he pays it off in full most months. Busick says he strives to maintain strong credit.

“I don’t have late payments,” he said. “I pay all my bills on time.”

Busick is eying a Sony television or Dell or Hewlett- Packard computer that could cost $2,000.

“If I want something, I will get it,” he says.

Or (and),

With higher gas prices and lower personal income, consumers had to borrow more to buy the same amount. So somewhat lower gas prices might not mean more spending, just less borrowing and some paying down of credit cards

Yes, the federal deficits have largely repaired consumer balance sheets. But a new ‘borrowing to spend’ cycle has not yet emerged, which has been the driver of prior expansions.

The problem is, the prior borrowing to spend cycles were driven by circumstances that no one wants to repeat- the sub prime expansion of a few years ago, the dot com bubble of the late 1990’s, the S and L expansion phase of the 1980’s that drove the Reagan years, the emerging market lending boom of the prior decade, etc. etc. etc.

After Japan’s credit bubble burst in 1991 they’ve been very careful not to repeat that performance, and have stagnated ever since, even with what are considered relatively high levels of govt deficit spending.

My point is, the demand leakages seem to be high enough such that without an extraordinary surge in private sector credit expansion we need a lot higher deficit to close the output gap.

Which to me is a good thing. I’d prefer lower taxes for a given level of public expenditure to another credit bubble. But when govt. doesn’t understand this, and instead looks to reduce the federal deficit, the result is high unemployment and a relatively weak economy, again, much like Japan.

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Innocent fear mongering from St. Louis Fed’s Bullard

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This is bad beyond description, as it displays total ignorance of the difference between interest rate determination in fixed vs floating exchange rate regimes, which may be the only thing standing between this disaster of an economy and unimaginable prosperity.

Worse is that it goes unchallenged, apart from the still relatively small MMT community.

Fed Frets Over U.S. Fiscal Recklessness

Lawmakers and investors shouldn’t take comfort in low U.S. borrowing costs because markets are often “complacent” about the risk from excessive deficit spending, said James Bullard, president of the Federal Reserve Bank of St. Louis.

“When it does blow up it will be too late,” Bullard said in an interview last month in New York. “When markets lose confidence in the U.S. and say that they don’t trust us any more, rates will skyrocket and the crisis will be upon you.”

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China’s ‘vital’ interests at stake over Greek crisis

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It’s more than China’s ‘vital interests’ as over their a loss of public funds from a Greek default could mean heads roll- literally- as there is a history of actual execution for failure and disgrace.

And note the past tense- China had helped by buying their debt.

Also, note the anecdotal signs of weakness, highlighted below:

Headlines:
China President Hu: Global Economic Recovery ‘Slow And Fragile’
China’s ‘vital’ interests at stake over Greek crisis
China Yuan Band Widening Would Have ‘Political’ Meaning Only
Consumer Spending Fades in China Economy After ‘Peak Days’
China economy faces over-tightening risk – government economist

China President Hu: Global Economic Recovery ‘Slow And Fragile’

June 17 (Dow Jones) — Chinese President Hu Jintao said Friday that the global economic recovery is still “slow and fragile” and is threatened by a resurgence of protectionism in various forms.

“There still exist some lagging effects of the financial crisis,” he said at a keynote speech at an investment forum in Russia.

Despite failing to agree on a landmark deal for gas supplies from Siberia, Hu was upbeat on the outlook for bilateral trade with Russia, which is rich in other natural resources crucial to China’s economic development.

Hu said he hopes to raise the level of annual bilateral trade between the two countries to $100 billion by 2015, and $200 billion by 2020, compared with $60 billion in 2010.

In 2009, Russia and China agreed in principle to construct two pipelines that would export natural gas from Siberia to China, but a final agreement has been held up due to persistent differences on gas pricing.

Late Thursday, the two sides failed to reach an agreement during last-minute talks at Gazprom headquarters in Moscow.

China’s ‘vital’ interests at stake over Greek crisis

June 17 (Guardian) — China’s “vital” interests are at stake if Europe cannot resolve its debt crisis, the Chinese foreign ministry said on Friday as it voiced concern about the economic problems of its biggest trading partner.

At a media briefing ahead of Chinese premier Wen Jiabao’s visit to Europe next week, vice foreign minister Fu Ying made plain that China had tried to help Europe overcome its troubles by buying more European debt and encouraging bilateral trade.

“Whether the European economy can recover and whether some European economies can overcome their hardships and escape crisis, is vitally important for us,” she said.

“China has consistently been quite concerned with the state of the European economy.”

Wen is due to visit Hungary, Britain and Germany late next week, just months after he visited France, Portugal and Spain and offered to help Europe overcome its debt woes.

With Greece on the verge of a debt default, investors will focus on whether China promises to buy even more debt from beleaguered European nations including Greece, and increase its investment in the region.

China is a natural prospective investor in European assets and government debt because it has $3.05 trillion (£1.9tn) in foreign currency reserves, the world’s largest.

With a quarter of the reserves estimated to be invested in euro-denominated assets, it is clearly in Beijing’s interest to help Europe survive its debt turmoil.

“We have supported other countries, especially European countries, in their efforts to surmount the financial crisis,” Fu said. “We have, for example, increased holdings of euro debt and promoted China-European Union trade.”

Beijing has said in the past that it has bought Greek debt, but has never revealed the size of its investment.

Since eurozone debt worries first rippled through markets last year, China has repeatedly said that it has confidence in the single-currency region.

“We have hoped to help eurozone countries in overcoming the crisis, and this is also a measure that is beneficial to China’s own economic development,” Fu said.

But mirroring deteriorating market confidence on Europe, China’s central bank published a report this week saying the economic bloc risked worsening its problems if it did not contain debt levels.

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