Category Archives: Deficit

Germany- falling deficit and slowing growth

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I agree, without private sector credit expansion (falling nominal savings rate) or rising exports these two go together over time:

German Economic Growth Will Likely Slow, Finance Ministry Says

By Brian Parkin

May 19 (Bloomberg) &#8212 The pace of Germany’s economic growth will probably slow by mid-year after jumping 1.5 percent in the first quarter, the Finance Ministry said in its monthly report. Economic growth “may be somewhat slower during the rest of the year,” the ministry said. While business confidence has declined, “it remains at a high level” and unemployment, at a 19-year low last month, will continue to profit from growing domestic demand, the ministry said. Germany’s Economy Ministry sees growth of 2.6 percent this year. Tax revenue for the federal government and states jumped 8.9 percent in the first quarter compared with last year, led by sales tax, the ministry said. Federal and state tax revenue in April grew 3.4 percent compared with a year ago, it said.

Bundesbank Says German Deficit May Fall Below 2% This Year

Brian Parkin and Jana Randow

May 20 (Bloomberg) &#8212 Tax revenue growth and spending cuts will probably help German Chancellor Angela Merkel’s government push down the budget deficit, setting an example for fiscal discipline in Europe, the Bundesbank said.

Germany’s budget shortfall could drop below 2 percent of gross domestic product this year, the Frankfurt-based central bank said in its monthly report published today.

“This notably mirrors a clear structural improvement, although the ongoing cyclical recovery is also making an important contribution,” the Bundesbank said.

The German government may be able to cut its spending gap to some 30 billion euros ($43 billion) from the 48 billion euros in the budget, the Bundesbank said. New tax forecasts that show revenue soaring over earlier estimates through 2014 may further help to push down the federal deficit beyond 2011, it said.

“A federal deficit of 30 billion euros seems achievable” this year, the Bundesbank said. “In subsequent years, this improved situation will be perpetuated,” boosting the chances of the government adhering to its target of balancing the federal budget by 2015, it said.

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Debt Ceiling dynamics- no chance of US default

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Republican Senator Pat Toomey is now making the point that with debt payment an executive priority,
and with tax receipts more than sufficient for interest payments,
not raising the debt ceiling will not mean default,
instead it will mean other federal spending will get cut,
which he pronounced analogous to a partial government shut down.

While this has always been factually correct, it is only very recently that this has become the lead response from the Republicans, in direct response to warnings by the Democrats of a US default.

With the Democrats being exposed as factually wrong and guilty of at least innocent fear mongering, their entire negotiating position is weakened by both the facts and their reduced credibility in general.

So I have to conclude the end result will be dramatic spending cuts,
no tax increases, a large reduction in long term aggregate demand,
and most likely reductions in short term aggregate demand as well.

The Democrats are now left with fighting for alternative spending cuts, with the military a prime target.

In fact, they may already be cutting military spending, as the executive branch is not necessarily compelled to spend the funds authorized by Congress, but can selective not fund or delay funding in the normal course of business. So, for example, they may be able to cut $150 billion a year from actual military spending and score it as something over $2 trillion in savings over 10 years, which would reduce the need for other cuts currently under consideration. And this might be the motivation for brining as many troops back home as possible, from all over the globe.

These kinds of cuts would remove maybe 1-2% of nominal gdp from 2012, support unemployment and the dollar, help keep the Fed on hold, as, in general, fear of becoming the next Greece continues to cause us to work to turn ourselves into the next Japan.

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Financial Repression Coming to America: El-Erian

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Unfortunately, I can’t say that policy makers with as little understanding of actual monetary as he has won’t do that type of thing.

(Nor can’t I say he isn’t talking position)

I can say they all seem heck bent on deficit reduction, which is probably the most severe and effective form of economic repression.

And $US short covering, in its various forms,
which may already be in the early stages as suggested in previous posts,
should reveal any underlying deflationary forces of repression.

Financial Repression Coming to America: El-Erian

May 17 (CNBC) — The co-CEO of the world’s largest bond fund has warned America that it faces a combination of higher inflation, austerity and financial repression over the coming years as policy makers grapple with the impact of the financial crisis and the subsequent policy response.

“Think of the debt overhangs in advanced economies where projected rates of economic growth are not sufficient to avoid mounting debt and deficit problems,” said Mohamed A. El-Erian in speech at a PIMCO forum on growth.

“Some are already flashing red, and they will force even more difficult decisions between restructuring and the massive socialization of losses, like Greece,” he added.

“Others are flashing orange, like the US, and already require future sacrifices, most likely through a combination of higher inflation, austerity and, importantly, financial repression,” said El-Erian, who classifies financial repression as seeking to impose negative real rates of returns on savers.

This policy will undermine the real return contract offered to savers and, in El-Erian’s view, come instead of any bold moves to address structural problems and imbalances.

“Secular baseline portfolio positioning should minimize exposure to the negative impact of financial repression, hedge against higher inflation and currency depreciation and exploit the heightened differentiation in balance sheets and growth potentials,” El-Erian added.

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Warren’s latest presentation

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Attached is a copy of a presentation that Warren delivered yesterday in Montreal.

We were extremely well received and Warren was a huge hit, mixing a concoction of high dose monetary economic realities with real life experiences and anecdotes from his long and lustrous career as a market wizard. The presentation was scheduled for 45 minutes but turned into 1hr20 minutes including Q&A.

Presentation link here.

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Australia’s Budget Will Make ‘Substantial’ Savings, Swan Says

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The names of the nations change but the out of paradigm values are universal:

Australia’s Budget Will Make ‘Substantial’ Savings, Swan Says

By Gemma Daley

May 8 (Bloomberg) — Australia’s budget will make “substantial” savings after revenue was crimped by a record exchange rate, the nation’s costliest natural disasters and Japan’s earthquake, Treasurer Wayne Swan said.

Swan, who delivers the budget to Parliament tomorrow, said yesterday the deficit in the government’s finances will widen in the fiscal year ending June 30 before increased mining revenue and an improving economy help bring about a surplus in 2012-13.

Prime Minister Julia Gillard’s administration has revealed the budget will tighten welfare payments to get people back into the workforce and cut 1,000 jobs in the civilian defense industry in the next three years. The government also aims to stop high-income earners receiving a subsidy for having private health insurance.

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Galbraith on federal debt sustainability

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Is The Federal Debt Unsustainable?

By Professor James K. Galbraith

Excerpt

A more prosaic problem with the runaway-inflation scenario is that the “nonpartisan, professional” economic forecasters of the Congressional Budget Office (CBO), whose work is often cited as the benchmark proof of an “unsustainable path,” do not expect it to happen. The CBO baseline resolutely asserts that inflation will stay where it is now: around 2 percent. So one can’t logically cite the inflation threat and the CBO baseline at the same time. So far as I know, the CBO does not trouble itself to model the exchange value of the dollar.

What the CBO does warn is that, under their assumptions, the ratio of US federal debt (held by the public) to GDP will rise relentlessly, passing 200 percent by 2035 and 300 percent by midcentury. Correspondingly, net interest payments on that debt would rise to exceed 20 percent of GDP. This certainly seems worrisome, and the CBO warns about “investor confidence” and “crowding out” without actually building these things into their model. Indeed, in their model this remarkable and unprecedented ratio of debt to GDP goes right along with steady growth, full employment, and low inflation, world without end! Why one should care about mere financial ratios if they produce such good—and, according to the CBO model— “sustainable” results is another mystery the CBO does not explain.

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from Press Conference

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I thought he did a AAA job within his paradigm.

The answers on the dollar were spot on- ultimately the dollar is worth what it can buy, so ‘low inflation’ is a strong dollar policy in the long term. It’s pretty much the purchasing power parity argument. Additionally, he said a strong economy helps the dollar, citing the capital inflow channel, probably a reference to China and other emerging market nations. And I might have added the fiscal tightening channel, as strong economies tend to cause federal deficits to fall via automatic fiscal stabilizers.

Interestingly, he did not mention specifically how higher oil prices, set by a foreign monopolist, continue to work against the dollar.

Nor how highly deflationary policies in other currencies tend to strengthen those currencies relative to the dollar.

And there was no mention of how portfolio shifting alters the dollar, which may be the largest driver currently.

Let me suggest, however, it would have been more nearly correct for him to have said the policy of low inflation and strong growth also happens to support the dollar, rather than imply a strong dollar was the policy variable.

He remains out of paradigm on the QE issue, still not realizing it’s entirely about price and not quantity, but that was to be expected.

The more dovish tone from the FOMC indicates some fundamental insecurity about the economy. Yes, they remain moderately optimistic, but probably continue to worry disproportionately about the downside risks. They see downside risks to demand everywhere from the euro zone and the UK, to Japan and China, and, though recognizing nothing of consequence has happened yet, they hear the fiscal sabre rattling from both the left and the right. And they see it’s unlikely for the housing channel to provide much support in the near future as it’s done in previous cycle.

Also, second chance to buy my 100oz gold bar at the current spot price of gold!
When I offered it for sale when gold was $1,200, no one wanted it so I still have it.

:)


Karim writes:

1) Extended period means a ‘couple of meetings’.
2) Q1 GDP weakness transitory (i.e., they didn’t alter the outlook for rest of f/cast period) due to
   a. timing of defense outlays
   b. timing of export shipments
   c. weather
3) No fiscal measures that have been announced so far have altered their near-term outlook
4) Impact of Japan supply disruptions ‘moderate and temporary’
5) Strong and stable dollar in U.S. best interest

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MBA’s index of loan requests for home purchases tumbled 13.6 percent

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This is disturbing, along with still weak housing price indicators, and the ongoing downward revisions to GDP forecasts, as aggregate demand remains under international attack on all fronts.

On the govt side, China is cutting demand to fight inflation, with India and Brazil presumed to be doing same. Austerity measures continue to bite in the UK and the euro zone, and are looming in the US.

On the private credit expansion side, regulatory over reach continues to restrict lending by the US banking system, and particularly with the small banks. This limits both bank and non bank lending, as the non bank lending is most often at least indirectly dependent on bank lending.

Additionally, the rising costs of food and fuel are taking purchasing power from those with the higher propensities to consume and shifting it to those with far lower propensities to consume.

And, of course, ongoing QE continues to remove interest income from the economy, as does the shift of interest income from savers to bank and other lender net interest margins, in a process that has yet to reach the national debate as a point of discussion.

Other commodity prices also continue to rise as hoarding from pension funds and the like via passive commodity strategies continues to expand globally.

This sends price signals that increase supply, which means human beings are being mobilized to produce stockpiles of gold, silver, and other metals and commodities not to ever be used for real consumption, but to forever remain as ‘reserves’ to index financial performance as demanded by current institutional structures. This is a monumental waste of human endeavor as well as the real resources, including energy, that are committed to this process.

So at the macro level we are removing teachers from what have become over crowded classrooms, removing nurses from neglected patients, and removing workers from building, repairing, and maintaining our homes and other infrastructure, to send them to either the unemployment lines or the gold mines.

And because they think at any moment we can suddenly become the next Greece, both sides agree with the necessity and urgency of promoting this policy.

Mortgage Applications Fell Last Week: MBA

April 27 (Reuters) — Applications for U.S. home mortgages fell last week as higher insurance premiums for government-insured loans sapped demand, an industry group said Wednesday.

The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 5.6 percent in the week ended April 22.

“Purchase applications fell last week, driven primarily by a sharp decrease in government purchase applications as new, higher Federal Housing Administration premiums went into effect,” Michael Fratantoni, MBA’s vice president of research and economics, said in a statement.

The decline reverses a recent increase in government purchase applications, which was likely due to borrowers trying to beat the deadline, Fratantoni said.

The MBA’s seasonally adjusted index of loan requests for home purchases tumbled 13.6 percent, while the gauge of refinancing applications slipped 0.6 percent.

Fixed 30-year mortgage rates averaged 4.80 percent in the week, easing from 4.83 percent the week before.

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More on the euro zone deficit report

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Yes, the deficit went from 6.3% to 6% of GDP, but the question remains as to whether they are at the point where further slowing from austerity measures continue to reduce the overall deficit or, instead, an induced slowdown begins to increase it.

Euro Zone 2010 Deficit Shrinks, Debt Rises

April 26 (Reuters) — The euro zone’s aggregated budget deficit fell last year as most countries slashed government spending to restore market confidence in public finances, but the debt still grew, Eurostat data showed.

The European Union’s statistics office said on Tuesday the budget deficit in the euro zone in 2010 was 6.0 percent of gross domestic product, down from 6.3 percent in 2009. Public debt, however, rose to 85.1 percent from 79.3 percent in 2009.

All euro zone countries except Germany, Ireland, Luxembourg and Austria improved their budget balance last year, but debt rose in all euro zone countries except Estonia.

Eurostat said Greece, which was forced to seek emergency funding from the euro zone last year because it was effectively cut off from market borrowing due to its large debt, cut its budget gap to 10.5 percent of GDP from 15.4 percent in 2009.

This is well above the initial target of the Greek austerity programme of 8 percent and even above the latest estimate from the European Union and the International Monetary Fund of 9.6 percent.

Greek public debt rocketed to 142.8 percent of GDP from 127.1 percent in 2009.

Ireland saw its budget deficit more than double to 32.4 percent of GDP last year from 14.3 percent in 2009 and its debt jumped to 96.2 percent from 65.6 percent as the country had to borrow to bail out its banking sector.

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