Category Archives: France

Franco-German Spat on Role of ECB Renewed

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Not long ago France would have conducted a nuclear test to make the point.
Today, it takes a core meltdown to make the point:

Franco-German Spat on Role of ECB Renewed

By Tony Czuczka and Mark Deen

November 18 (Bloomberg) — The failure of European leaders to end the debt crisis with their broadest effort yet has revived a Franco-German dispute over theEuropean Central Bank’s role and fueled investor concerns over policy makers’ economic impotence.

ECB chief Mario Draghi today slammed governments for failing to implement policy commitments as holders of Greek debt began talks in Athens on structuring a 50 percent writeoff that was the cornerstone of a deal pieced together last month at an all-night summit. Officials in Berlin and Paris yesterday swapped barbs and European borrowing costs outside of Germany rose to euro-era records.

The discord highlighted markets’ brushoff of a package that included a scaled-up rescue fund, proposed guarantees of sovereign debt and a bid to attract more international loans. The accord, which finance ministers aim to implement next month, was at least the fourth plan billed as a comprehensive strategy to end the crisis born in Greece in 2009, none of which provided a lasting fix.

“Where is the implementation of these long-standing decisions?” Draghi said in a speech in Frankfurt today. “We should not be waiting any longer.”

Stocks slid, dragging the MSCI All Country World Index to a six-week low. The Stoxx Europe 600 Index decreased 0.7 percent. The premium France pays over Germany to borrow for 10 years jumped to a record 200 basis points yesterday, as yields on bonds of countries from Portugal to Finland, the Netherlands to Austria also rose relative to Germany.

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Trading Desk reports “mayhem” in the AAA Eurozone markets

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I just received this.
Seems money managers with fiduciary responsibility are holding off on buying any euro member securities since the 50% Greek haircuts were announced.

Our Trading Desk reports “mayhem” in the AAA Eurozone markets
– France 11bps wider
– Netherlands 6bps wider
France now 178bps over Germany
Increasing talk/fear of Eurozone break up and capitulation trades in AAA markets are widespread.
We are seeing no real demand for anything – even Germany.
Tomorrow’s Shatz auction looks a big ask with a yield of 30bps and no risk appetite out there.

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News recap comments

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The news flow from last week was so voluminous it was nearly impossible to process. For good measure I want to start today’s commentary with a simple recap of what happened.

On the negative side –

· Greece called a referendum and threw bailout plans up in the air taking Greek 2yrs from 70% to 90% or +2000bps.
· Italian 10yr debt collapsed 40bps with spreads to Germany out 70bps. The moves were far larger in the 2yr sector.
· France 10y debt widened 25bps to Germany. At one point spreads were almost 40 wider.
· Italian PMI and Spanish employment data were miserable.
· German factory orders plunged 4.3 percent on the month.
· The planned EFSF bond for 3bio was pulled.
· Itraxx financials were +34 while subs were +45.
· Draghi predicted a recession for Europe along with disinflation.
· The G20 was flop – there was no agreement on IMF involvement in Europe.
· The US super committee deadline is 17 days away with no clear agreement.
· The 8th largest US bankruptcy in history took place.
· US 10yr and 30yr rallied 28bps, Spoos were -2.5%, the Dax was -6% and EURUSD was -3%.
· German CDS was up 16bps on the week.

On the positive side –

· The Fed showed its hand with tightening dissents now gone and an easing dissent in place.

Too bad what they call ‘easing’ at best has been shown to do nothing.

· The Fed’s significant downside risk language remained intact.

Downside risks sound like bad news to me.

· In the press conference Ben teed up QE3 in MBS space.

Which at best have been shown to do little or nothing for the macro economy.

· US payrolls, claims, vehicle sales and productivity came in better than expected.

And the real output gap if anything widened.

· S&P earnings are coming in at +18% y/y with implied corporate profits at +23 percent q/q a.r.

Reinforces the notion that it’s a good for stocks, bad for people economy.

· Mortgage speeds were much faster than expectations suggesting some easing refi pressures.

And savers holding those securities saw their incomes cut faster than expected.

· The ECB cut 25bps and indicated a dovish forward looking stance.

Which reduced euro interest income for the non govt sectors

· CME Margins were reduced.

Just means volatility was down some.

· There was a massive USDJPY intervention which may be a precursor to a Swiss style Japanese policy easing.

Which, for the US, means reduced costs of imports from Japan, which works against US exports, which should be a good thing for the US as it means for the size govt we have, taxes could be lowered to sustain demand, but becomes a bad thing as our leadership believes the US Federal deficit to be too large and so instead we get higher unemployment.

· The Swiss have indicated they want an even weaker CHF – possibly EURCHF 1.40.

When this makes a list of ‘positives’ you know the positives are pretty sorry

· The Aussies cut rates 25bps

Cutting net interest income for the economy.

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France Unveils New Budget Savings as Growth Slows

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May as well call it the Sarcophagus plan.

It’s all they know how to do.
And again, like the carpenter said of his piece of wood,
no matter how many times I cut it it’s still too short.

France Unveils New Budget Savings as Growth Slows

By Alexandria Sagr

November 7 (Reuters) — France will announce about 8 billion euros of budget cuts and tax hikes for 2012 on Monday, imposing more pain on voters to protect its credit rating and curb its deficit in a gamble for President Nicolas Sarkozy six months from an election.

Sarkozy’s center-right government says extra savings are urgently needed to keep France’s finances from going off the rails, since it cut its growth forecast for next year to 1 percent from 1.75 percent last week.

The announcements could be make-or-break for Sarkozy as he tries to reassure financial markets and ratings agencies without costing him his re-election chances with French voters.

The measures, to be unveiled by Prime Minister Francois Fillon, come on top of 12 billion euros in savings announced just three months ago.

Le Monde newspaper said he would flag cuts totaling up to 17 billion euros by 2016.

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Noda Makes Consumption Tax Hike Pledge At G-20 Summit

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The world’s poster child for losing decades looks to stay a step ahead:

(Nikkei)–Prime Minister Yoshihiko Noda vowed Thursday to gradually raise the nation’s consumption tax to 10% by mid the 2010s during a summit meeting of the Group of 20 leading economies in Cannes, France.

The announcement at the summit has effectively made the tax hike an international pledge, and is expected to be included in an action program due out Friday.

Noda stressed the importance of rebuilding debt-ridden Japanese finances and told G-20 leaders that fiscal consolidation is a must “for Japan to be put back on a sound economic growth path, regardless of the debt crisis in the euro zone.”

He also spoke to reporters that a Diet dissolution should be carried out before implementing the tax hike. “If we go to the people in a general election (to seek a mandate on the consumption tax hike), we should do so after passing related bills but before implementing them,” he said.

As to Japan’s participation in the Trans-Pacific Partnership free trade pact, Noda told reporters he will accelerate efforts to iron out differences within the Democratic Party of Japan, which he leads. “We have to close ranks and shouldn’t be split,” he said.

Noda showed his flexibility in making concessions to a controversial redemption period of reconstruction bonds aimed at funding rebuilding efforts of the March 11 disaster, in hopes of enlisting support from the Liberal Democratic Party and New Komeito, the main opposition parties.

“Our policy chief said that we envisage a 15-year period (for the redemption of reconstruction bonds), but there’s room for concessions,” he said.

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Mosler: Greek Default Not Logical Path Out of Crisis

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Mosler: Greek Default Not Logical Path Out of Crisis

By Forrest Jones and Kathleen Walter

September 30 — Letting Greece default won’t end Europe’s crisis and won’t allow Germany and other core nations to brush themselves off and move merrily on their way, says Warren Mosler, principal and co-founder of AVM, an international bond firm with 30 years of experience in Europe and author of the 2010 book, “The 7 Deadly Innocent Frauds of Economic Policy.”

In fact, it will do the opposite. It will cost money and rattle key export markets for Germany and other countries targeting European periphery countries.

Greece has run up debts and may default and exit the euro, yet many in wealthier nations such as Germany oppose bailouts for Greece and other debt-ridden Mediterranean nations.

They also have opposed backing euro-wide bonds, which basically shores up the Greek economy via the financial backing of the Greece’s richer northern neighbors.

However, allowing the European Central Bank to play a role in Greece’s economic reform will not put the load on German, French and other taxpayers, Mosler says.

“It’s a question if a bailout now is good for Germany and France but not so good for Greece, because if Greece is allowed to default, then their debt goes away. They are agreeing to wipe out their debt and it reduces their payments,” he said in an exclusive Newsmax.TV interview.

“But if they fund Greece, and don’t allow them to default, then Greece has to continue to make these payments. So the whole dynamic has changed from doing Greece a favor to disciplining Greece by not allowing them to default.”

That makes default, arguably, less imminent.

“I would think the odds are shifting to the endgame where Greece doesn’t default, where at the end of the day Greece is forced though the austerity measures to run a primary balance or primary surplus, the interest payments will largely wind up with up with the European Central Bank, who is buying Greek debt in the marketplace,” Mosler says.

Furthermore, the logic that applies to keeping Greece in the eurozone applies to the other nations such as Italy.

“It used to be if Germany, France and the others bailed out Greece, and then suddenly they have to bail out Ireland, Portugal, Spain and Italy, they could never have the capacity to do that. It’s now understood that there is no limit, no nominal limit to the check that the European Central Bank can write,” Mosler says.

Plus, Europe can expect no side effects of such Central Bank involvement.

“It will not weaken the euro, it will not cause inflation and it will not increase total spending in the region. In fact it will help reduce total spending in the region because the European Central Bank imposes terms and conditions when it intervenes.”

Should Greece default, however, Europe would feel the pain, but it shouldn’t be too bad in the United States, Mosler says.

Yes, regulators would have to react.

“The FDIC would have to decide how they would want to respond to a drop in equity. Would they want the banks to raise more capital? Would they give them time to do it?”

But they wouldn’t have to react too much.

“They don’t need to shut the banks down, it doesn’t need to be disruptive to the real economy.”

Turning to the United States and President Barack Obama’s economic policies, Mosler says the president is on the right track by running deficits, but adds he’s doing a poor job of explaining the rationale behind his policies.

Or he just doesn’t understand it.

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EU Daily | Eurozone PMI at two-year low as new orders fall in all countries

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Weakness and continued austerity. My guess is it will take serious blood in the streets before policy changes

IMF and eurozone clash over estimates

(FT) International Monetary Fund work, contained in a draft version of its Global Financial Stability Report, uses credit default swap prices to estimate the market value of government bonds of the three eurozone countries receiving IMF bail-outs – Ireland, Greece and Portugal – together with those of Italy, Spain and Belgium. Although the IMF analysis may be revised, two officials said one estimate showed that marking sovereign bonds to market would reduce European banks’ tangible common equity by about €200bn ($287bn), a drop of 10-12 per cent. The impact could be increased substantially, perhaps doubled, by the knock-on effects of European banks holding assets in other banks. The ECB and eurozone governments have rejected such estimates.

ECB Lends Euro-Area Banks 49.4 Billion Euros for Three Months

(Bloomberg) The European Central Bank said it will lend euro-area banks 49.4 billion euros ($71.3 billion) in three-month cash. The ECB said 128 banks bid for the funds, which will be lent at the average of the benchmark rate over the period of the loan. The key rate is currently at 1.5 percent. Banks must repay 48.1 billion euros in previous three-month loans tomorrow. The ECB re-introduced an unlimited six-month loan this month and extended full allotment in its shorter-term operations through the end of the year as tensions on European money markets grew. ECB President Jean-Claude Trichet on Aug. 27 rejected the suggestion that there could be a liquidity crisis in Europe, citing the central bank’s non-standard measures.

Eurozone PMI at two-year low as new orders fall in all countries

(Markit) Manufacturing PMI fell from 50.4 in July to 49.0 in August, its lowest level since August 2009 and below the earlier flash estimate of 49.7. National PMIs held just above the 50.0 no-change mark in Germany, the Netherlands and Austria, but signalled contractions in Ireland, France, Italy, Spain and Greece. Only the Irish PMI rose compared to July, but still remained in contraction territory. The weakness highlighted by the headline PMI reflected falling volumes of both output and new business in August. The Eurozone new orders-to-finished goods inventory ratio, which tends to lead the trend in production, fell to its lowest for almost two-and-a-half years.

European Central Bank Said To Purchase Italian Government Bonds

Sept. 1 (Bloomberg) — The European Central Bank is buying Italian securities, according to two people with knowledge of the transactions. They declined to be identified because the transactions are confidential.

A spokesman for the ECB declined to comment.

Germans, Dutch, Finns to Meet on Crisis Amid Collateral Spat

Sept. 1 (Bloomberg) — The German, Dutch and Finnish finance ministers will meet on Sept. 6 in Berlin to discuss the euro-area debt crisis as a Finnish demand for collateral threatens to delay a second Greek bailout.

“We will discuss how to go forward with this crisis and the future,” Dutch Finance Minister Jan Kees de Jager told reporters in The Hague today. “It’s about fighting this fire, but more importantly, how do we prevent such a fire.”

Finland’s demand for collateral from Greece as a condition for contributing to a second rescue package has triggered calls for similar treatment from countries including Austria and the Netherlands. De Jager said an agreement on collateral shouldn’t take long to reach.

“I see room for a solution; there are proposals on the table to discuss,” De Jager said. “I think it will be possible to provide equal treatment for creditors without the disadvantage of the proposed deal between Finland and Greece, which is unthinkable because it uses extra money from the EFSF to provide collateral to Finland.”

The 440 billion-euro ($628 billion) European Financial Stability Facility is the euro region’s rescue fund.

Weidmann Says ECB Must Scale Back Crisis Measures to Reduce Risk

Sept. 1 (Bloomberg) — European Central Bank council member Jens Weidmann said the bank must scale back the additional risks it has shouldered to help counter the region’s debt crisis.

Measures taken by the ECB have “strained the existing framework of the currency union and blurred the boundaries between the responsibilities of monetary policy on one side and fiscal policy on the other,” Weidmann, who heads Germany’s Bundesbank, said at an event in Hanover today. Over time this can damage confidence in the central bank, he said. “It is therefore valid to scale back the extra risks monetary policy has taken on.”

The ECB is lending euro-area banks as much money as they need at its benchmark rate and has also re-started its bond purchase program — a step Weidmann opposed — in an attempt to stem the spreading debt crisis. While European leaders on July 21 re-tooled their 440-billion-euro ($629 billion) rescue fund, allowing it to buy government debt on the secondary market, national parliaments still need to ratify the changes.

“Decisions on taking further risks should be made by governments and parliaments, as only they are democratically legitimized,” Weidmann said.

He said one option for a long-term solution to Europe’s debt crisis could be “a real fiscal union.”

“Should one be unwilling or unable to take this path, then the existing no-bailout clause in the treaties, and the accompanying disciplining of fiscal policy, should be strengthened instead of being completely gutted,” he said.

Weidmann said his comments don’t relate to current economic developments or ECB policy, citing the one-week blackout prior to a rate decision. ECB officials will convene on Sept. 8 in Frankfurt.

German manufacturing PMI lowest since September 2009

(Markit) At 50.9, down from 52.0 in July, the final seasonally adjusted Markit/BME Germany PMI was around one index point lower than the ‘flash’ figure of 52.0. Growth of German manufacturing output eased fractionally since the previous month and was the slowest since July 2009. Latest data pointed to a fall in intakes of new work for the second month running and the rate of contraction was the fastest since June 2009. The downturn in sales to export markets was highlighted by a further reduction in new business from abroad in August, with the rate of contraction also the sharpest for over two years. Meanwhile, stocks of finished goods at manufacturing firms accumulated at the steepest pace since the survey began in April 1996.


German Trade, Consumption Damped Second-Quarter GDP Growth

(Bloomberg) Private consumption contracted 0.7 percent in the second quarter. GDP increased 0.1 percent from the first quarter, when it gained 1.3 percent, the office said, confirming its initial Aug. 16 estimate. Exports rose 2.3 percent from the first quarter, when they gained 2.1 percent. Imports surged 3.2 percent in the second quarter after rising 1.7 percent in the first. That resulted in net trade reducing GDP growth by 0.3 percentage point. Companies stocked up inventories, which contributed 0.7 percentage point to GDP growth. Gross investment also added 0.7 percentage point to growth. Private consumption subtracted 0.4 percentage point and a 0.9 percent decline in construction spending cut 0.1 percentage point off GDP.

Carrefour posts net loss in 1st half

(AP) Europe’s largest retailer Carrefour SA posted an unexpected net loss in the first half and abandoned its growth target for the year amid the economic slowdown. The French retailer reported a net loss of euro249 million ($359 million) in the first six months of the year, compared with a profit of euro97 million a year earlier. Carrefour said it expects its operating profit to decline this year, reversing a target the retailer set in March when it said an ongoing and expensive “transformation plan” would raise profits this year. As it did last year, Carrefour booked what it calls “significant one-off charges” again in the first half. They amounted to euro884 million in the first half, over half of which went to writing down the value of Carrefour’s Italian assets.

Greece set to miss deficit target

(AP) Greece is likely to miss its budget targets in 2011 even if it fully implements painful reforms a parliamentary panel of financial experts said. “The increase in the primary deficit in combination with a further drop in economic activity strengthens significantly the dynamics of debt, offsetting the benefits from the decisions of the summit of July 21, and distancing the possibility of stabilization of the debt to GDP in 2012,” the panel, known as the State Budget Office, wrote in a report. Citing government figures, it said the 2011 January-July deficit stands at euro15.59 billion ($22.53 billion) with a primary deficit of 2.4 percent of gross domestic product, as opposed to a euro12.45 billion ($17.99 billion) shortfall and 1.5 percent primary deficit in that period last year.

Italy Drops Pension Changes, Will Announce Budget Amendments

(Bloomberg) The Italian government has dropped proposed changes to pension rules agreed to this week from a 45.5 billion-euro ($65.5 billion) austerity plan being discussed in parliament that aims to balance the budget by 2013. Giorgia Meloni, minister for youth and sport policy, told reporters that the government decided to withdraw the proposal agreed to by Prime Minister Silvio Berlusconi and Finance Minister Giulio Tremonti two days ago. On Aug. 29, Berlusconi’s office announced that the government had dropped a planned bonus tax on Italians earning more than 90,000 euros a year and reduced cuts in transfers to regional and local authorities. It did not provide details of how the lost deficit reduction of 4.5 billion euros from those changes would be compensated.

Crisis exposes weakness of Italian coalition

(FT) Giulio Tremonti, finance minister, was said to be in “damage limitation” mode on Wednesday, seeking to assure Italy’s partners that a budget could still get through parliament’s twin chambers by the end of next week, despite prime minister Silvio Berlusconi’s decision to jettison some key proposals, including a wealth tax. Three weeks after the centre-right cabinet agreed an austerity package – with €45.5bn ($65.4bn) of savings intended to balance the budget by 2013 – the government on Wednesday missed its self-imposed deadline to present legislation to the senate, the first step towards parliamentary approval. Insiders admit, however, that the budget could amount to a stopgap measure, the second since July, and might need to be reinforced at a later date.

Spanish PM: deficit cap amendment essential

(AP) “It is true that it is a reform done in a very short time span, because we need it,” Prime minister Jose Luis Rodriguez Zapatero said. The amendment of the 1978 constitution enshrines the principle of budgetary discipline into Spain’s constitution, but does not specify numbers. These will come in a separate law that is to be passed by June 2012. The Socialists and conservatives have agreed the law will stipulate that Spain’s deficit cannot exceed 0.4 percent of GDP, but that threshold will not take effect until 2020. Their support is enough for the bill to pass when it is voted on Friday in the lower house of Parliament and presumably next week in the Senate. Time is pressing because the legislature dissolves Sept. 27 in order to get ready for general elections Nov. 20.

Spain Expects ‘Chain’ of Market Turbulence, Valenciano Says

(Bloomberg) “We’re probably going to get back into a chain of financial turbulence in September and October,” Elena Valenciano, Socialist party campaign chief, said in an interview. Valenciano said the constitutional amendment is necessary as Spain must avoid following Greece, Ireland and Portugal into seeking a European bailout. “We have to say this because sometimes talking of a rescue seems almost something positive: any kind of intervention in Spain would be a great misfortune for the country,” she said. Valenciano said authorities “didn’t expect August to be as bad as it was” and that the gap may widen again in the next two months, “not so much because of our own debt, but because of Italy’s debt.”

Portugal Raises Taxes to Meet Deficit Targets in Rescue Plan

(Bloomberg) Portugal will raise capital gains tax and increase levies on corporate profit and high earners to reach the deficit-reduction goals in its 78 billion-euro ($112 billion) bailout. The government will impose a tax surcharge of 3 percent on companies with income above 1.5 million euros, add a bonus tax of 2.5 percent on the highest earners and raise the levy on capital gains by 1 percentage point to 21 percent, Finance Minister Vitor Gaspar said. The moves will help trim the budget deficit from 5.9 percent of gross domestic product this year to the European Union ceiling of 3 percent in 2013, he said. The shortfall will narrow to 0.5 percent in 2015. The government will reduce its deficit even as the economy contracts 2.2 percent this year and 1.8 percent next year, before expanding 1.2 percent in 2013, he said.

Ireland’s unemployment rate rises to 14.4 percent

(AP) Ireland’s unemployment rate has risen to 14.4 percent. Ireland has been trying to escape its 3-year recession through export growth led by its multinational companies. But the domestic economy remains dormant because of weak consumer demand, high household debts and a collapsed real-estate market. The Central Statistics Agency said Wednesday that unemployment rose from July’s rate of 14.3 percent, the fourth straight monthly increase. A record-high 470,000 people in Ireland, a country of 4.5 million, are claiming welfare payments for joblessness. About 17 percent are foreigners, chiefly Eastern Europeans who immigrated during the final years of Ireland’s 1994-2007 Celtic Tiger boom.

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comments on Krugman’s post

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Franc Thoughts on Long-Run Fiscal Issues

By Paul Krugman

August 11 (NYT) — Regular readers of comments will notice a continual stream of criticism from MMT (modern monetary theory) types, who insist that deficits are never a problem as long as you have your own currency.

Right, ability to pay is not an issue.

I really don’t want to get into that fight right now, because for the time being the MMT people and yours truly are on the same side of the policy debate. Right now it really doesn’t matter at all whether the United States issues zero-interest short-term debt or simply prints zero-interest dollar bills, and concern about crowding out is just bad economics.

Right.

But we won’t always be in a liquidity trap.

We don’t have one now. It’s a fixed fx concept at best.

But we won’t always be in a liquidity trap.

Someday private demand will be high enough that the Fed will have good reason to raise interest rates above zero, to limit inflation.

Yes, because they ignore the interest income channels.

And when that happens, deficits — and the perceived willingness of the government to raise enough revenue to cover its spending — will matter.

Yes, deficit spending adds to aggregate demand and nominal savings to the penny. Add too much and you get ‘demand pull inflation’

With fixed fx, that can drive up interest rates and threaten reserves. With floating fx it only causes the currency to fluctuate.

I have a specific example that illustrates my point: France in the 1920s, which I wrote about in my dissertation lo these many years ago. Like many nations, France came out of World War I with very large debts, peaking at 240 percent of GDP according to this recent IMF presentation (pdf, slide 17). And France was unable politically to raise enough taxes to cover the cost of servicing that debt. And investors lost confidence in the government’s solvency.

If it was a floating fx policy, interest rates would have been wherever the bank of france set them. If it was a fixed fx policy, rates would be market determined, as the tsy had to compete with the option to convert at the CB.

And taxes falling short of spending is the norm in most nations. Japan for example has one of the largest debts and deficits and one of the strongest currencies. So there’s more to it.

Various expedients were tried, including — late in the game — creation of monetary base, which was advocated by a finance minister on the (very MMT) grounds that the division of government liabilities between currency and short-term bills made no difference. But it turned out that it did: the franc plunged, and the price level soared.

He still hasn’t indicated whether it was a fixed or floating fx policy, and I don’t recall, so I can’t comment.

Now as it turned out this was just what the doctor ordered: because France’s budget problem was overwhelmingly the debt overhang rather than current spending, inflation eroded the real value of that debt and made possible the Poincare stabilization of 1926.

Yes, if a nation goes to a fixed fx policy at the’wrong’ price a further adjustment can address that, though it still doesn’t address the fundamental difficulties of living with a fixed fx policy.

So what does this say about the United States? At a future date, when we’re out of the liquidity trap,

that we aren’t in

public finances will matter — and not just because of their role in raising or reducing aggregate demand. The composition of public liabilities as between debt and monetary base does matter in normal times —

Yes, it determines the term structure of risk free rates.

hey, if it didn’t, the Fed would have no influence, ever.

True, and it doesn’t have much in any case, apart from shifting income between savers and borrowers and altering the interest income of the economy, which is a net saver to the tune of the govt debt, to the penny.

So if we try at that point to finance the deficit by money issue rather than bond sales, it will be inflationary.

Only under a fixed exchange rate policy, which we don’t have.

And unlike France in the 1920s, such a hypothetical US deficit crisis wouldn’t be self-correcting: the biggest source of our long-run deficit isn’t the overhang of debt, it’s the prospective current cost of paying for retirement, health care, and defense. So such a crisis — again, it’s very much hypothetical — could spiral into something very nasty, with very high inflation and, yes, hyperinflation.

Highly unlikely. It would probably take annual deficit of well over 20% to get that kind of inflation from excess demand.

Now, all of this is remote right now. And notice too that France in the 1920s stabilized with debt of 140 percent of GDP — far higher than the numbers that are supposed to terrify us now. So none of this is relevant to the current policy debate.

But since the MMTers seem to have decided to harass those of us who want stronger action now but think there really is a long-run fiscal issue, I needed to put this out there.

MMT explains the difference between fixed and floating fx policy.

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Jobless Claims Dip, Still in Range; Trade Deficit Jumps

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As previously discussed, the real economy seems to be muddling through, and at firmer levels than the first half of the year.

The trade report will probably result in Q2 GDP being revised down to just below 1%, but up from the .4% reported for Q1

So Q3 still looks like it will be at least as strong as q2 and likely higher with lower gasoline prices and Japan coming back some.

With corporate profits still looking reasonably strong, corporations continue to demonstrate they can do reasonably well even with low GDP growth and high unemployment.

And with a federal deficit of around 9% of GDP continually adding income, sales, and savings I don’t see a lot of downside to GDP, sales, and profits, though a small negative print is certainly possible.

Jobless Claims Dip, Still in Range; Trade Deficit Jumps

August 11 (Reuters) — New U.S. claims for unemployment benefits dropped to a four-month low last week, government data showed on Thursday, a rare dose of good news for an economy that has been battered by a credit rating downgrade and falling share prices.

Initial claims for state unemployment benefits fell 7,000 to a seasonally adjusted 395,000, the Labor Department said, the lowest level since the week ended April 2.

Economists polled by Reuters had forecast claims steady at 400,000. The prior week’s figure was revised up to 402,000 from the previously reported 400,000.

The Federal Reserve said on Tuesday economic growth was considerably weaker than expected and unemployment would fall only gradually. The U.S. central bank promised to keep interest rates near zero until at least mid-2013.

Hiring accelerated in July after abruptly slowing in the past two months. However, there are worries that a sharp sell-off in stocks and a nasty fight between Democrats and Republicans over raising the government’s debt ceiling could dampen employers’ enthusiasm to hire new workers.

The continued improvement in the labor market could help to allay fears of a new recession, which have been stoked by the economy’s anemic growth pace in the first half of the year.

A Labor Department official said there was nothing unusual in the state-level claims data, adding that only one state had been estimated.

The four-week moving average of claims, considered a better measure of labor market trends, slipped 3,250 to 405,000. Economists say both initial claims and the four-week average need to drop close to 350,000 to signal a sustainable improvement in the labor market.

The number of people still receiving benefits under regular state programs after an initial week of aid dropped 60,000 to 3.69 million in the week ended July 30.

The number of Americans on emergency unemployment benefits fell 26,309 to 3.16 million in the week ended July 23, the latest week for which data is available.

A total of 7.48 million people were claiming unemployment benefits during that period under all programs, down 89,945 from the prior week.

Trade Gap Grows

The US. trade gap widened in June to its largest since October 2008, as both U.S. imports and exports declined in a sign of slowing global demand, a government report showed on Thursday.

The June trade deficit leapt to $53.1 billion, surprising analysts who expected it to narrow to $48 billion from an upwardly revised estimate of $50.8 billion in May.

Overall U.S. imports fell by close to 1 percent, despite a rise in value of crude oil imports to the highest since August 2008. Higher volume pushed the oil import bill higher, as the average price for imported oil fell to $106 per barrel after rising in each of the eight prior months.

U.S. exports fell for a second consecutive month to $170.9 billion, as shipments to Canada, Mexico, Brazil, Central America, France, China and Japan all declined.

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France getting fried

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As previously discussed,
back in the days before the euro, every few years the large French banks would take what were then massive write offs, with the French govt. writing the check and adding a bit to the French govt’s budget deficit, and life went on.

The idea that after switching to the euro French banks would suddenly upgrade their underwriting to the point where the periodic massive write offs would no longer take place seemed illogical to me.

So along those lines, after a dozen or so years with no major losses, it’s very possible some very large loan losses could be about to surface.

The way this hurts the US is through equity valuations for companies that trade with the euro zone, as well as currency translations of assets and earnings should the euro fall.

THE CATALYST FOR LOWER STOCK PRICES IS COMING OUT OF EUROPE..SPECIFICALLY FRANCE.. THE RUMORS OF FRANCE BEING DOWNGRADED SEEM TO BE UNFOUNDED, BUT CDS CONTINUES TO WIDEN.. THIS MORNING, SARKOZY CAME IN FROM HIS CHATEAU TO HEAD UP HIS WEEKLY WEDNESDAY MEETING. THE DIFFERENCE WAS THAT BANK OF FRANCES NOYER WAS IN ATTENDANCE, WHICH IS UNUSUAL…THE MARKET IS SPECULATING THAT A FRENCH BANK IS IN TROUBLE… SOCGEN STOCK IS DOWN OVER 20%….THE REAL BENEFICIARIES OF TRADING ARE THE UK AND GERMANY IN THAT ORDER…UK 10 YEARS ARE 23 BETTER, GERMANY 16 BETTER AND FRANCE 14 BETTER… THE EURO HAS GONE FROM 1.44 TO 1.418 TODAY.. AGAIN…SOCGEN IS THE RUMOR..WE SAW IT ON MONDAY IN A BB ARTICLE..WE HEAR IT AGAIN TODAY…

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