As previously discussed. It’s all part of the overall deflationary scenario from the US federal budget deficit being too small:
Merck said sales in the latest period were reduced between 1 percent and 2 percent due to currency translation.
For the rest of the year, currency is expected to trim between 2 percent and 3 percent from its sales.
Not to be outdone by the rest of the world’s central bankers:
Japan Not Immune To Debt Crisis, BOJ Kamezaki Says
By Tatsuo Ito
February 28 (DJ) — A Bank of Japan policy board member said Wednesday that Japan is not immune to a Europe-style debt crisis as confidence in the country’s government bonds could quickly weaken if concerns over its fiscal state mount.
The European crisis “is not a fire on the other side of the river,” Hidetoshi Kamezaki told business leaders in Fukuoka, western Japan, using an phrase frequently employed by Japanese policy makers over the last few months to warn that a Europe-style crisis could spread to Japanese shores.
“It’s not appropriate to assume there won’t be concerns about JGBs,” in the future just because the bonds continue to be smoothly bought in the market, Kamezaki said, adding that confidence in government debt can change unexpectedly.
Japan’s fiscal conditions are the worst among developed nations, with a gross public debt of around 200% of its annual economic output, but the country has so far avoided a Greece-style crisis as domestic investors hold almost all of its debt.
An ample and steady flow of funds from overseas in the form of a surplus in its current account — which includes trade — has financed the debt, but recent data suggest that could be changing.
Japan recorded a trade deficit for all of last year, meaning that if the trend were to continue, the country may need to rely on foreign capital to finance its debt, like many of the European countries being hit by the debt crisis.
Kamezaki played down the possibility of Japan’s current account moving into the red, saying flows of income stemming from the country’s external assets worth Y250 trillion could be maintained.
“The trend of Japan’s current account surplus will not change for a while unless the trade deficit grows rapidly,” Kamezaki said.
At around 0030 GMT, the benchmark 10-year government bond yield was at 0.965%.
Kamezaki also said the central bank should keep actively implementing policies to ensure the Japanese economy can overcome deflation and achieve sustainable growth with price stability.
“The BOJ should continue to pro-actively implement policies needed to achieve these purposes,” Kamezaki said.
The BOJ on Feb. 14 surprised the markets by boosting the size of its asset purchase program–the main tool for credit easing amid near zero interest rates–to Y65 trillion from Y55 trillion by increasing purchases of Japanese government bonds. It also clarified a near-term inflation goal for overcoming deflation.
The financial markets have reacted positively to the BOJ’s actions, with the dollar briefly hitting a nine-month high of Y81.66 on Monday and the stock market rallying.
As previously discussed, all policies seem to be ‘strong euro’ first.
And the ‘success’ of the euro continues to be gauged by its ‘strength’.
The haircuts on the Greek bonds are functionally a tax that removes that many net euro financial assets. Call it an ‘austerity’ measure extending forced austerity to investors.
Other member nations will likely hold off on turning towards that same tax until after Greece is a ‘done deal’ as early noises could work to undermine the Greek arrangements, and take the ‘investor tax’ off the table.
Like most other currencies, the euro has ‘built in’ demand leakages that fall under the general category of ‘savings desires’. These include the demand to hold actual cash, contributions to tax advantaged pension contributions, contributions to individual retirement accounts, insurance and other corporate ‘reserves’, foreign central bank accumulations euro denominated financial assets, along with all the unspent interest and earnings compounding.
Offsetting all of that unspent income is, historically, the expansion of debt, where agents spend more than their income. This includes borrowing for business and consumer purchases, which includes borrowing to buy cars and houses. In other words, net savings of financial assets are increased by the demand leakages and decreased by credit expansion. And, in general, most of the variation is due to changes in the credit expansion component.
Austerity in the euro zone consists of public spending cuts and tax hikes, which have both directly slowed the economies and increased net savings desires, as the austerity measures have also reduced private sector desires to borrow to spend. This combination results in a decline in sales, which translates into fewer jobs and reduced private sector income. Which further translates into reduced tax collections and increased public sector transfer payments, as the austerity measures designed to reduce public sector debt instead serve to increase it.
Now adding to that is this latest tax on investors in Greek debt, and if the propensity to spend any of the lost funds of those holders was greater than 0, aggregate demand will see an additional decline, with public sector debt climbing that much higher as well.
All of which serves to make the euro ‘harder to get’ and further support the value of the euro, which serves to keep a lid on the net export channel. The ‘answer’ to the export dilemma would be to have the ECB, for example, buy dollars as Germany used to do with the mark, and as China and Japan have done to support their exporters. But ideologically this is off the table in the euro zone, as they believe in a strong euro, and in any case they don’t want to build dollar reserves and give the appearance that the dollar is ‘backing’ the euro.
And all of which works to move all the euro member nation deficits higher as the ‘sustainability math’ of all deteriorate as well, increasing the odds of the ‘investor tax’ expanding to the other member nations that continues the negative feedback loop.
Given the demand leakages of the institutional structure, as a point of logic prosperity can only come from some combination of increased net exports, a private sector credit expansion, or a public sector credit expansion.
And right now it looks like they are still going backwards on all three.
Comes back to the idea that resolving solvency issues in the euro zone doesn’t fix the economy.
And with negative growth the solvency math doesn’t work for any of the euro members.
And what’s with the ECB threatening to back away on liquidity support for the banking system?
So looks to me like the Greek resolution is not the end of the solvency issues, but that the focus simply moves on to the next weaker sister.
And, as previously discussed, the risk remains elevated that if Greece gets to haircut its obligations and gets funding, others will ask for the same, triggering a general, global, catastrophic financial meltdown.
My first order proposal remains an ECB distribution on a per capita basis to the euro member nations of maybe 10% of euro zone GDP per year to put the solvency issue behind them. Along with relaxed budget rules, maybe allowing deficits up to 6% of GDP annually, further supported by the ECB funding a transition job at a non disruptive wage to facilitate the transition from unemployment to private sector employment. I might also recommend deficits be increased by suspending VAT as a way to increase aggregate demand and lower prices at the same time.
Alternatively, the ECB could simply guarantee all national govt debt and rely on the growth and stability pact for fiscal discipline, which would probably require enhanced authorities.
And rather than trying to bring Greece’s deficit down to current target levels, they could instead relax the growth and stability pact limits to something closer to full employment levels. And, again, I’d look into suspending VAT to both increase aggregate demand and lower prices.
Meanwhile, elsewhere in today’s world news:
The likes of Ford adding to pension funds makes the point of the increasing and ongoing demand leakages putting a damper on GDP.
And oil prices have now crept up enough to materially cut into aggregate demand as well.
Nor are banks adding to capital to meet expanding demand for credit, which remains anemic.
Headlines:
Data Suggests Euro Zone May Slide Back Into Recession
German Manufacturing Slows as New Export Orders Fall
China’s Factory Activity Shrinks for Fourth Month
ECB Preparing to Close Liquidity Floodgates
Ford Pours $3.8 Billion Into Pension Plan
Oil Could Turn to Headwind as Dow Flirts With 13,000
UBS to Issue More Loss-Absorbing Capital
Iran ‘Winning’ on Oil Sanctions: Top Trader
Greek Bailout Puts Focus Back on Credit Default Swaps
Iran Fuels Oil-Price Rally—And Prices Could Keep Rising
There is probably not much voter support for returning to the drachma.
The voters would probably rather have the Germans run their finances than their own leaders.
They’ve seen past drachma financial dramas, with interest rates spiking for everyone, not just the govt, rampant inflation, and a collapsing currency as well as high unemployment.
With the euro none of that happened, so it’s not obvious the currency is the problem.
What does seem obvious to them is that their leaders are the problem.
So I expect the austerity measures to pass, as the alternative is 0 deficit spending.
And if discounts are ‘granted’ the politics quickly move towards same for the rest of the euro member nations.
Not much progress here:
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.
No let up on the austerity demands, which are now to be legislated via balanced budget rules.
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.
Good report!
Additional notations below:
Karim writes:
U.S. GDP growth in Q4 a bit weaker than expected at 2.8%
Perhaps the FOMC had word of this, explaining the unexpected dovishness?
1.9% of that growth accounted for by inventories. Other contributions: (consumer spending 2%, fixed investment 0.4%, government spending -0.9%, net exports -0.1%).
Rebuilding post earthquake supply lines probably now complete.
Govt spending continues weak, as revenues increase some and the federal deficit falls some.
Imports rise quickly with any increase in consumer spending.
In growth terms: (consumer spending 2%, fixed investment 3.3%, government spending -4.6%, exports 4.7% and imports 4.4%).
So stripping away inventories, growth was below trend. Plus savings rate fell back to 3.7% from 3.9%.
Domestic savings down with spending up indicates increasing consumer debt.
The question is whether this is ‘wanted’ as per increased desires to buy on credit,
or because the decline in govt deficit spending ‘forced’ more consumer debt for ‘essentials’
And, core PCE slowed from 2.1% to 1.1%.
Also explains FOMC dovishness as they see risk as asymmetrical, fearing deflation more than inflation.
In sum, will keep QE3 talk very much alive
And somewhat moot, even as Q1 GDP forecasts are being revised down some, as most don’t think QE matters much for the real economy.
What’s becoming understood is that while there is ‘more the Fed can do’
for all practical purposes there is nothing they can do to further support the real economy.
Euro money and lending data shockingly weak in December.
Might partially explain how some banks apparently got the balance sheet room to buy more national govt debt?
In particular, record single month decline in lending to the non-bank private sector (74bn). Of that, 37bn decline in lending to non-financial corporates and 8bn drop in lending to households.
This should be very supportive of additional ECB rate cuts over the next few months.