Category Archives: Government Spending

Japan- economic ramifications

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Nothing much to say here about the financial aspects. Need to see how they react.

Best I can tell this doesn’t effect the world economy all that much.

Oil demand may initially fall some, due to a temporary reduction in consumption and maybe a refinery shut down. And domestic demand in general may fall until the rebuilding starts.

The power lost by the nuclear plants shutting down may amount to maybe 1-2% of total electric power consumption, and will be replaced but a combo of different sources.

Replacing the nuclear plants will cost something but not a lot in the scheme of things, and the new ones are even safer than the older ones, which seem to have help up reasonably well, especially considering the extreme stresses.

Govt deficit spending may go up by a small % of GDP as will the spending of insurance company and other private reserves.
And insurance companies then replenishing their reserves does the reverse.

I’d guess they govt will direct most of the rebuilding contracts to domestic companies.

I don’t see anything that makes the yen stronger?

Japan should have more than adequate resources of all types immediately available as emergency services, shouldn’t need any help from anyone, though for political purpose they will certainly accept it.

They’ve been saying for years there’s nothing left for govt to buy, so they must have thousands of emergency helicopters, millions of emergency temporary housing trailers, etc. etc. ready to go?

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A few Boehnalities and other notables on the US going broke

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Cross currents of right and wrong but always for the wrong reasons.

Bonds Show Why Boehner Saying We’re Broke Is Figure of Speech

By David J. Lynch

March 7 (Bloomberg) — House Speaker John Boehner routinely offers this diagnosis of the U.S.’s fiscal condition: “We’re broke; Broke going on bankrupt,” he said in a Feb. 28 speech in Nashville.

Boehner’s assessment dominates a debate over the federal budget that could lead to a government shutdown. It is a widely shared view with just one flaw: It’s wrong.

“The U.S. government is not broke,” said Marc Chandler, global head of currency strategy for Brown Brothers Harriman & Co. in New York. “There’s no evidence that the market is treating the U.S. government like it’s broke.”

Wrong reason! Broke implies not able to spend.

The US spends by crediting member bank accounts at the Fed, and taxes by debiting member bank accounts at the Fed.

It never has nor doesn’t have any dollars.

The U.S. today is able to borrow at historically low interest rates, paying 0.68 percent on a two-year note that it had to offer at 5.1 percent before the financial crisis began in 2007.

That’s simply a function of where the Fed, a agent of Congress, has decided to set rates, and market perceptions of where it may set rates in the future. Solvency doesn’t enter into it.

Financial products that pay off if Uncle Sam defaults aren’t attracting unusual investor demand. And tax revenue as a percentage of the economy is at a 60-year low, meaning if the government needs to raise cash and can summon the political will, it could do so.

All taxing does is debit member bank accounts. The govt doesn’t actually ‘get’ anything.

To be sure, the U.S. confronts long-term fiscal dangers.

For example???

Over the past two years, federal debt measured against total economic output has increased by more than 50 percent and the White House projects annual budget deficits continuing indefinitely.

So?

“If an American family is spending more money than they’re making year after year after year, they’re broke,” said Michael Steel, a spokesman for Boehner.

So?
What does that have to do with govts ability to credit accounts at its own central bank?

$1.6 Trillion Deficit

A person, company or nation would be defined as “broke” if it couldn’t pay its bills, and that is not the case with the U.S. Despite an annual budget deficit expected to reach $1.6 trillion this year, the government continues to meet its financial obligations, and investors say there is little concern that will change.

Still, a rhetorical drumbeat has spread that the U.S. is tapped out. Republicans, including Representative Ron Paul of Texas, chairman of the House domestic monetary policy subcommittee, and Fox News commentator Bill O’Reilly, have labeled the U.S. “broke” in recent days.

Chris Christie, the Republican governor of New Jersey, said in a speech last month that the Medicare program is “going to bankrupt us.” Julian Robertson, chairman of Tiger Management LLC in New York, told The Australian newspaper March 2: “we’re broke, broker than all get out.”

A similar claim was even made Feb. 28 by comedian Jon Stewart, the host of “The Daily Show” on Comedy Central.

So much for their legacies.

Cost of Insuring Debt

Financial markets dispute the political world’s conclusion. The cost of insuring for five years a notional $10 million in U.S. government debt is $45,830, less than half the cost in February 2009, at the height of the financial crisis, according to data provider CMA data. That makes U.S. government debt the fifth safest of 156 countries rated and less likely to suffer default than any major economy, including every member of the
G20.

There are two factors in default insurance. Ability to pay and willingness to pay. While the US always has the ability to pay, Congress does not always show a united willingness to pay. Hence the actual default risk.

Creditors regard Venezuela, Greece and Argentina as the three riskiest countries. Buying credit default insurance on a notional $10 million of those nations’ debt costs $1.2 million, $950,000 and $665,000 respectively.

“I think it’s very misleading to call a country ‘broke,'” said Nariman Behravesh, chief economist for IHS Global Insight in Lexington, Massachusetts. “We’re certainly not bankrupt like Greece.”

In any case, the euro zone member nations put themselves in the fiscal position of US states when they joined the euro.

That means a state like Illinois could be the next Greece, but not the US govt.

Less Likely to Default

CMA prices for credit insurance show that global investors consider it more likely that France, Japan, China, the United Kingdom, Australia or Germany will default than the U.S.

Pacific Investment Management Co., which operates the largest bond fund, the $239 billion Total Return Fund, sees so little risk of a U.S. default it may sell other investors insurance against the prospect. Andrew Balls, Pimco managing director, told reporters Feb. 28 in London that the chances the U.S. would not meet its obligations were “vanishingly small.”

Presumably a statement with regard to willingness of Congress to pay.

George Magnus, senior economic adviser for UBS Investment Bank in London, says the U.S. dollar’s status as the global economy’s unit of account means the U.S. can’t go broke.

That has nothing to do with it.

“You have the reserve currency,” Magnus said. “You can print as much as you need. So there’s no question all debts will be repaid.”

Any nation can do that with its own currency

The current concerns over debt contrast with the views of founding father Alexander Hamilton, the nation’s first Treasury secretary. At Hamilton’s urging, the federal government in 1790 absorbed the Revolutionary War debts of the states and issued new government securities in about the same total amount.

Alexander Hamilton

Unlike today’s debt critics, Hamilton “had no intention of paying off the outstanding principal of the debt,” historian Gordon S. Wood wrote in “Empire of Liberty: A History of the Early Republic 1789-1815.”

Instead, by making regular interest payments on the debt, Hamilton established the U.S. government as “the best credit risk in the world” and drew investors’ loyalties to the federal government and away from the states, wrote Wood, who won a Pulitzer Prize for a separate history of the colonial period.

Far be it from me to argue with a Pulitzer Prize winner…

From Oct. 1, 2008, the beginning of the 2009 fiscal year, through the current year, which ends Sept. 30, 2011, the U.S. will have added more than $4.3 trillion of debt. Despite White House forecasts of an additional $2.4 trillion of debt over the next three fiscal years, investors’ appetite for Treasury securities shows little sign of abating.

It’s just a reserve drain- get over it!

Govt spending credits member bank reserve accounts at the Fed

Tsy securities exist as securities accounts at the Fed.

‘Going into debt’ entails nothing more than the Fed debiting Fed reserve accounts and crediting Fed securities accounts and ‘paying off the debt’ is nothing more than debiting securities accounts and crediting reserve accounts

No grandchildren involved.

Longer-Term Debt

In addition to accepting low yields on two-year notes, creditors are willing to lend the U.S. money for longer periods at interest rates that are below long-term averages. Ten-year U.S. bonds carry a rate of 3.5 percent, compared with an average 5.4 percent since 1990. And U.S. debt is more attractive than comparable securities from the U.K., which has moved aggressively to rein in government spending. U.K. 10-year bonds offer a 3.6 percent yield.

“You are never broke as long as there are those who will buy your debt and lend money to you,” said Edward Altman, a finance professor at New York University’s Stern School of Business who created the Z-score formula that calculates a company’s likelihood of bankruptcy.

Who also completely misses the point.

Any doubts traders had about the solvency of the U.S. would immediately be reflected in the markets, a fact noted by James Carville, a former adviser to President Bill Clinton, after he saw how bond investors could determine the success or failure of economic policy.

No they can’t.

“I used to think if there was reincarnation, I wanted to come back as the president or the Pope or a .400 baseball hitter,” Carville said. “But now I want to come back as the bond market. You can intimidate everyone.”

Only those who don’t know any better.

Republican Dissenters

Republican assertions that the U.S. is “broke” are shorthand for a complex fiscal situation, and some in the party acknowledge the claim isn’t accurate.

“To say your debts exceed your income is not ‘broke,'” said Tony Fratto, former White House and Treasury Department spokesman in the George W. Bush administration.

The U.S. government nonetheless faces a daunting gap between its expected financial resources

It’s not about ‘financial resources’ when it comes to a govt that never has nor doesn’t have any dollars, and just changes numbers in our accounts when it spends and taxes

and promised future outlays. Fratto said the Obama administration’s continued accumulation of debt risked a future crisis, as most major economies also face growing debt burdens.

The burden is that of making data entries.

In the nightmare scenario, a crush of countries competing to simultaneously sell IOUs to global investors could bid up the yield on government debt and compel overleveraged countries such as the U.S. to abruptly slash public spending.

It could only compel leaders who didn’t know how it all worked to do that.

Not selling the debt simply means the dollars stay in reserve accounts at the Fed and instead of being shifted by the Fed to securities accounts. Why would anyone who knew how it worked care which account the dollars were in? Especially when spending has nothing, operationally, to do with those accounts.

Fratto dismissed the markets’ current calm, noting that until the European debt crisis erupted early last year, investors had priced German and Greek debt as near equivalents.

“Markets can make mistakes,” Fratto said.

So can he. That all applies to the US states, not the federal govt.

$9.4 Trillion Outstanding

If recent budgetary trends continue unchanged, the U.S. risks a fiscal day of reckoning, slower growth or both.

No it doesn’t.

Altman notes that the U.S. debt outstanding is “enormous.” As of the end of 2010, debt held by the public was $9.4 trillion or 63 percent of gross domestic product — roughly half of the corresponding figures for Greece (126.7 percent) and Japan (121 percent) and well below countries such as Italy (116 percent), Belgium (96.2 percent) and France (78.1 percent).

Once a country’s debt-to-GDP ratio exceeds 90 percent, median annual economic growth rates fall by 1 percent, according to economists Kenneth Rogoff and Carmen Reinhart.

Wrong, that’s for convertible currency/fixed exchange rate regimes, not nations like the US, Uk, and Japan which have non convertible currencies and floating exchange rates.

The Congressional Budget Office warns that debt held by the public will reach 97 percent of GDP in 10 years if certain tax breaks are extended rather than allowed to expire next year and if Medicare payments to physicians are held at existing levels rather than reduced as the administration has proposed.

So???

AAA Rating

For now, Standard & Poor’s maintains a stable outlook on its top AAA rating on U.S. debt, assuming the government will “soon reveal a credible plan to tighten fiscal policy.” Debate over closing the budget gap thus far has centered on potential spending reductions. S&P says a deficit-closing plan “will require both expenditure and revenue measures.”

Measured against the size of the economy, U.S. federal tax revenue is at its lowest level since 1950. Tax receipts in the 2011 fiscal year are expected to equal 14.4 percent of GDP, according to the White House. That compares with the 40-year average of 18 percent, according to the Congressional Budget Office. So if tax receipts return to their long-term average amid an economic recovery, about one-third of the annual budget deficit would disappear.

Likewise, individual federal income tax rates have declined sharply since the top marginal rate peaked at 94 percent in 1945. The marginal rate — which applies to income above a numerical threshold that has changed over time — was 91 percent as late as 1963 and 50 percent in 1986. For 2011, the top marginal rate is 35 percent on income over $373,650 for individuals and couples filing jointly.

Not Overtaxed

Americans also aren’t overtaxed compared with residents of other advanced nations. In a 28-nation survey, only Chile and Mexico reported a lower total tax burden than the U.S., according to the Organization for Economic Development and Cooperation.

In 2009, taxes of all kinds claimed 24 percent of U.S. GDP, compared with 34.3 percent in the U.K., 37 percent in Germany and 48.2 percent in Denmark, the most heavily taxed OECD member.

“By the standard of U.S. history, by the standard of other countries — by the standard of where else are we going to get the money — increased tax revenues have to be a part of the solution,” said Jeffrey Frankel, an economist at Harvard University who advises the Federal Reserve Banks of Boston and New York.

So much for his legacy.

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WSJ Euro Symposium- Eichengreen, Sinn, Feldstein, Solbes, Hanke

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The utter lack of understanding of monetary operations is telling.

None recognize the significance of the fiscal hierarchy move that shifted the euro member nations from currency issuer to currency users, making them much like US states in that regard.

None recognize the difference between deficits at the ‘currency issuer’ level and deficits at the ‘currency user’ level.

None recognize that the problem is a shortage of aggregate demand, that is not caused by a lack of available bank credit, and that ‘fixing the banks’ changes nothing in that regard.

None recognize that the liability side of banking is not the place for market discipline and that the ECB is the only source of credible deposit insurance.

None recognize that the ECB is in the role of currency issuer and is the only entity that is not revenue constrained.

None recognized the role of fiscal balance in offsetting the ‘savings desires’ that cause unemployment and the output gap in general.

None have proposed a means of allowing govt deficits that can be sustained at full employment levels.

None have recognized that the forces at work have resulted in the ECB has assuming the role of dictating permissible ‘terms and conditions’ for its funding that has become mandatory for the survival of the currency union. This includes the ECB dictating fiscal policy for the member nations.

This list could go on forever.

The text is below.

I couldn’t read it all and don’t suggest you read it either.

WSJ: The Future of the Euro: A Symposium

Fix the Banks, Fix the Currency
By Barry Eichengreen

For the euro to grow into a happy and healthy adult, many things must happen. Most importantly, Europe needs to fix its banking system. Many European banks, starting with Germany’s, are dangerously over-leveraged, undercapitalized, and exposed to Greek, Irish and Portuguese debt. Rigorous stress tests followed by capital injections are the most important step that governments can take to secure the euro’s place.

Since European leaders seem fixated on what to do after Greece’s rescue package runs out in 2013—often, it appears, to the neglect of more immediate problems—they should also contemplate transferring responsibility for supervising their banks from the national level to the newly created European Banking Authority. The mistaken belief that a single currency is compatible with separate national bank regulators is, at the most basic level, why Europe is in the fix it’s in.

Indeed, Europe’s budget deficits are largely a result of the continent’s festering banking crisis. Greece may be an exception, but it’s clearly of a kind. The whole euro area would benefit from stronger discipline on borrowers and lenders. However, it is fantastical to think that this can be achieved by imposing Germanic debt ceilings Continent-wide. Germany’s fiscal rules work because of Germany’s history. The idea that they can be mechanically transplanted to other countries is a historical thinking at its worst.

The only discipline guaranteed to prevent fiscal excesses is market discipline. Reckless borrowers and lenders must be made to pay for their actions. Governments with unsustainable debts should be forced to restructure them, damage to their sovereign creditworthiness or not. The banks that lent to them should similarly suffer consequences, as should the bondholders who provided those banks with funds.

But whether Europe can afford to let market discipline work comes back to the condition of its banks. Only if banks are adequately capitalized can they take losses without collapsing the financial system. Only if they are adequately capitalized can the European Central Bank refuse to buy more Greek, Irish and Portuguese bonds, and only then will the EU be able to say “no more bailouts.”

And once this experience with market discipline is burned into Europe’s collective consciousness, it will be correspondingly less likely that borrowers and lenders will again succumb to similar excesses.

In other words, European governments need to “put the risk back where it belongs, namely in the hands of the bondholders.” Those are not my words. They are from the mouth of Bundesbank President Axel Weber speaking in Dusseldorf on Feb. 21. But while President Weber is right about the principle, he is wrong to think this can wait until 2013.

Mr. Eichengreen is a professor at the University of California, Berkeley. His book, “Exorbitant Privilege: The Rise and Fall of the Dollar,” (Oxford University Press) was published in the U.K. last month.

Survival Isn’t Guaranteed
By Hans-Werner Sinn

In my opinion the euro should survive. Though its members are too many and too disparate, the monetary union must be maintained, largely with its current number of states, for the benefit of political stability. The euro also offers measurable economic benefits, among them substantial reductions in transaction costs and exchange risks, which are prerequisites for exploiting the benefits of free trade.

Whether the euro will survive is another matter. This very much depends on whether European countries implement political and private debt constraints that effectively limit capital flows. The trade imbalances from which the euro zone is currently suffering have resulted from excessive capital flows brought about by interest-rate convergence and the apparent elimination of investment risks after the currency conversion was announced some 15 years ago. While huge capital exports brought a slump to Germany, the countries at the euro zone’s southern and western peripheries overheated, with the bust and boom resulting in current-account surpluses and deficits respectively.

Automatic sanctions for excessive public borrowing, and a reform of the Basel system that forces banks to hold equity capital if they invest in government bonds, are among the political constraints necessary for the euro to survive. But much more important are private constraints.

After years of negligence, private markets have recently started to impose more rigid debt constraints on overheated euro economies. So the brakes kicked in eventually, but much too abruptly, triggering Europe’s sovereign debt crisis. What Europe needs is a crisis mechanism that is able to activate markets earlier and allow for a fine-tuning of the brakes they impose on capital flows; in sum, a crisis mechanism that helps to prevent a crisis in the first place and mitigates it when it occurs.

Such a system has recently been proposed by the European Economic Advisory Group at the Center for Economic Studies and the Ifo Institute for Economic Research (CESifo). The plan’s essential feature is a three-stage rescue mechanism that distinguishes between a liquidity crisis, impending insolvency, and full insolvency, and offers specific measures in each of these stages. The system places the most emphasis on a piecemeal debt-conversion procedure that contemplates haircuts in the second of these stages, which could help to avoid full insolvency by acting as an early warning signal for investors and debtors alike.

The system would allow Germany to gradually appreciate in real terms by living through a boom that generates higher wages and prices and thus reduces the country’s competitiveness, while cooling down the overheated economies of the south such that the resulting wage and price moderation would improve their competitiveness. European trade imbalances would gradually reduce.

If Europe, on the other hand, moves to a system of community bonds, where national debts are jointly guaranteed by all countries, then excessive capital flows would persist, and so would trade imbalances. The countries at Europe’s southern and western peripheries would abstain from necessary real depreciation, and Germany would not appreciate, with the result that trade imbalances would continue with ever-increasing foreign debt and asset positions respectively. In the end, Germans would own half of Europe. I do not dare to imagine the political tensions that would bring about. The death of the euro would be the least of our worries.

Mr. Sinn is president of Germany’s Ifo Institute for Economic Research and the CESifo Group.

David Gothard

Still an Economic Mistake
By Martin Feldstein

I continue to believe that the creation of the euro was an economic mistake. It was clear from the start that imposing a single monetary policy and a fixed exchange rate on a heterogeneous group of countries would cause higher unemployment and persistent trade imbalances. In addition, the combination of a single currency and independent national budgets inevitably produced the massive fiscal deficits that occurred in Greece and other countries. And the sharp drop in interest rates in several countries when the euro was launched caused the excessive private and public borrowing that eventually created the current banking and sovereign-debt crises in Spain, Ireland and elsewhere.

But history cannot be reversed. Despite these problems, the euro will continue to exist for the foreseeable future. It will continue even though that will require large fiscal transfers from Germany and other core nations to those euro-zone countries with large debts and chronic trade deficits.

One reason for the euro’s likely survival is purely political. The political elites who support the euro believe it gives the euro zone a prominent role in international affairs that the individual member countries would otherwise not have. Many of those supporters also hope that the euro zone will evolve into a federal state with greater political power.

There is also an economic reason that the euro will survive. While hard-working German voters may resent the transfer of their tax money to other countries that enjoy earlier retirement and shorter workweeks, the German business community supports paying taxes to preserve the euro because it recognizes that German businesses benefit from the fixed exchange rate that prevents other euro-zone countries from competing with Germany by devaluing their currencies.

The euro will not only survive but will likely continue to increase in value relative to the dollar as sovereign-wealth funds and other major investors shift an increasing share of their portfolios to euros from dollars.

Those investors had been quietly diversifying their investment funds to euros before the crisis began in Greece. They stopped temporarily because of uncertainty about the future of the currency. But they eventually came to recognize that the problems of the peripheral countries were not a problem for the euro and should be reflected in country-specific interest rates rather than in the euro’s value. The result was a rising euro and a renewed shift of portfolio balances to euros from dollars. As that process continues, the relative value of the euro will continue to rise.

Mr. Feldstein, chairman of the U.S. Council of Economic Advisers under President Reagan, is a professor of economics at Harvard University.

A Decade of Success
By Pedro Solbes

After 10 years with the euro, the economic crisis and its consequences in some countries of the euro zone have reopened the debate about the suitability of a single currency in the absence of a high level of political integration.

But the euro has been a great joint success, which has allowed for a long period of growth and price stability in Europe. It has had a different impact in each country, but its benefits have been seen across the board. The euro has permitted more coordinated action in Europe and has prevented competitive devaluations. This has been key not only for the euro zone, but also for the rest of Europe and even for the global economy. Without the euro, we would have witnessed an increase in protectionism, which would in turn have aggravated the impact of the crisis in Europe and elsewhere.

Would it have been easier to reach consensus in the G-20 without the euro zone? Would it have been easier to respond to the challenges and difficulties faced by the international financial system? Would there have been greater cash-flow access? The answer to all these questions is no. It could be argued that a fluctuating exchange rate could have limited the impact of the crisis in some countries. However, would the crisis have been avoided without correcting the fundamental problems in each country and subsequent generalized competitive devaluations? The absence of an exchange rate may have aggravated the problems that existed before the crisis. But have these been better tackled outside the euro? Some observers have affirmed that behavior outside the euro zone has not been any better.

Quite a few countries of the euro zone already faced significant risks before the crisis, both real (real-estate bubble, public and/or private debt) and financial (inadequate risk management or excessive dependence on external funding). In addition, in some cases, uncoordinated fiscal and monetary policies in the euro zone could have helped generate the problem. Experience shows that the Maastricht architecture designed to manage the euro zone has been lacking. Focusing economic-policy coordination in the fiscal arena, coupled with a somewhat lax implementation of norms, has not been enough. Leaving the task of correcting imbalances in the hands of euro member states has not worked. The crisis has brought to the fore the lack of a mechanism to help troubled countries before their problems end up affecting the entire euro zone.

As is often the case with the European construction process, the problem resides not only in diagnosing the problem. There is an urgent need for clear and quick solutions, backed by the political will to comply with what has been agreed, something not always easy to achieve when dealing with 27 different countries.

Even though it has not been adopted by all EU member states, the euro is today, as German chancellor Angela Merkel has recently expressed, an inherent element of the European integration process. The euro is here to stay and the real challenge is how to make it more efficient.

Mr. Solbes is chairman of the Executive Committee of FRIDE and former Spanish minister of economy.

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China’s Top Priority in 2011 Is Controlling Inflation: Wen

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Sounds like very strong language to me.
As previously discussed, in the past inflation in China has led to regime change.
And also as previously discussed, China would have to be the exception to the rule to do it without a recession.

China’s Top Priority in 2011 Is Controlling Inflation: Wen

March 4 Reuters) — China’s Premier Wen Jiabao said on Saturday the nation had to tame inflation that threatened social stability as the government seeks to steer the world’s second-biggest economy towards more balanced, greener growth.

In China’s version of a “State of the Union” address to be presented later to the annual parliament session, Wen said the government aims to contain inflation to within 4 percent this year.

Failure to rein in price rises for food, housing and other goods could become more than an economic problem for the ruling Communist Party, which is jittery about social unrest especially after the upheavals shaking the Middle East.

“Recently, prices have risen fairly quickly and inflation expectations have increased. This problem concerns the people’s well-being, bears on overall interests and affects social stability. We must, therefore, make it our top priority in macroeconomic control to keep overall price levels stable,” Wen said in a work report prepared for delivery before the National People’s Congress.

Wen said that inflation was among the immediate worries weighing on China’s efforts to unleash new sources of domestically driven growth that will spread wealth more evenly.

“Expanding domestic demand is a long-term strategic principle and basic standpoint of China’s economic development as well as a fundamental means and an internal requirement for promoting balanced economic development,” said the prepared text of his speech.

The Premier’s annual address is given in the cavernous Great Hall of the People, crowded with thousands of delegates who are vetted by the Communist Party to acclaim and approve its policies.

But the Premier’s televised speech is also aimed at hundreds of millions of ordinary citizens who the Party leaders fear could become sources of discontent unless their grievances about price rises, unaffordable housing and expensive healthcare are eased.

Wen made clear that addressing those concerns would preoccupy China’s economic policy, shaping decisions on everything from farmers’ incomes to the yuan exchange rate.

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EU Daily | Europe’s Bank Signals It May Raise Interest Rates to Tamp Down Inflation

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So the ECB,
which is funding the entire euro zone banking system,
and for all practical purposes backstopping the funding of the national govts as well
to keep their funding costs manageable as they struggle with the terms and conditions of the austerity mandates,

That same ECB is now looking to raise rates, a proposal which is already working to increase the funding costs of those national govts.

They must think hiking rates is the tool to use to control the ‘inflation’ they are concerned about?

‘Inflation’ that’s come from tax hikes and relative value shifts in food and energy, as a foreign monopolist hikes crude prices and the burning up of our food supply for fuel hikes food prices?

Rate hikes that shift funds from borrowers, like the national govts they are supporting, to rentiers who will be getting the pay increase from higher rates?

And rising interest rates will require more austerity measures to offset the increased interest expense?

Yes, they also believe ‘inflation’ comes from elevated ‘inflation expectations’ but even that channel of causation, as far fetched as it is, has to be confused by the large output gap and general weakness of aggregate demand? Higher interest rates will somehow cause trade unions to soften demand for pay increases so their members can afford to eat?

Seems it goes back to the old Bundesbank dynamic, where the CB would threaten politically distasteful rate hikes if the govt didn’t tighten fiscal?

Well, today the ECB is already controlling fiscal, so it’s all moot.

But the old reflexes are still there.

Somewhat the like the old reflex with regard to export driven growth, but without the ideological option of buying dollars previously discussed.

So putting it all together, they have the export driven policy reflex without the dollar buying that’s undermining itself by driving the euro higher, working to limit demand from exports,
as the ECB both funds the financial structure and imposes austerity which is working against domestic demand.

And the rate hike reflex which won’t alter the price pressures from food, energy, and taxes.

And no telling what they may do next.
With their levels of unemployment, food price increases, and a general feeling that there are no ideas from on high to get them out of this mess, and large pools of newly arrived immigrants getting hurt them most, civil unrest is not impossible?

Maybe recognize that Europe is nothing more than a poorly managed theme park, and get a Disney exec to run it?

German Two-Year Yields Climb to Two-Year High on ECB Rate Bets

By Emma Charlton and Keith Jenkins

March 4 (Bloomberg) — German two-year government notes rose while their Greek equivalents fell, on concern higher borrowing costs may hamper the region’s most indebted countries, spurring demand for the euro zone’s safer assets.

Greece’s two-year yields reached the highest since May 10, the first trading day after the European Union and the international Monetary Fund announced the creation of a bailout fund to backstop the euro. European Central Bank President Jean- Claude Trichet said yesterday it’s “possible” that rates will rise at the central bank’s April meeting. His comments drove the German two-year yield up 23 basis points yesterday, the biggest increase since January 2009.

“There are some questions being asked about what tighter policy does for wider Europe, so that’s helping the bid toward core product,” said Eric Wand, a rates strategist at Lloyds Bank Corporate Markets in London. “Trichet was pretty clear that there would be a hike come April, so that’s going to underpin the German front-end going forward.”

The two-year note yield was two basis points lower at 1.76 percent as of 10:56 a.m. in London after reaching 1.84 percent, the highest since December 2008, according to data compiled by Bloomberg. The 1.5 percent security due March 2013 rose 0.035, or 35 euro cents per 1,000-euro ($1,387) face amount, to 99.49. The yield on German 10-year bunds, Europe’s benchmark government debt securities, was one basis point lower at 3.32 percent.

March 25 Deadline

Trichet will speak alongside governing council members including Mario Draghi and Christian Noyer at a Banque de France conference in Paris today. The ECB’s anti-inflation stance comes as European Union leaders approach a March 25 deadline for a reinforced plan to aid debt-strapped countries.

Greece’s two-year yields surged 24 basis points to 15.16 percent. The yield difference between German 2-year notes and Greek securities of a similar maturity was 13.41 percentage points, the widest since May 7, according to data compiled by Bloomberg.

Ten-year bunds were higher before a U.S. labor market report that is forecast to show employers added 196,000 workers last month, after a 36,000 gain in January, according to the median forecast of 84 economists surveyed by Bloomberg News. The report may also show the jobless rate increased to 9.1 percent from 9 percent.

“Right in front of payrolls data, people aren’t going to want to set too much risk on their books,” Wand said.

German-U.S. Spread

The yield difference, or spread, between German two-year notes and U.S. securities of the same maturity, narrowed four basis points to 98 basis points. It reached 103 basis points yesterday, the highest since Dec. 30, 2008, as traders added to bets that the European Central Bank will raise borrowing costs before the Federal Reserve.

The Frankfurt-based central bank, which left its key rate at a record low of 1 percent yesterday, is concerned about so- called second-round inflation effects, when companies raise prices and workers demand more pay to compensate for soaring energy and food costs, Trichet said. Euro-area inflation accelerated to 2.4 percent last month.

Euribor futures fell, pushing the implied yield on the contract expiring in December 2011 up two basis points to 2.18 percent. Earlier it rose to 2.215 percent, matching the highest since Feb. 22, 2010, as investors added to bets that the ECB will increase borrowing costs.

Forward contracts on the euro overnight index average, or Eonia, signal investors think the ECB will increase the key rate 25 basis points by its July meeting, Deutsche Bank AG data shows.

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Why the public sector is not overpaid

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The rhetoric is that the public sector is overpaid relative to the private sector.
Ok, they don’t adjust for education and probably a few other things, but it all still misses the point.

Back when I was a kid in Ct. the 50’s, I recall the private sector jobs paying a lot more than the public sector jobs. People worked for the US Post Office, for example, because of the security, or because they couldn’t get a higher paying private sector job for one reason or another.

So seems since then things have reversed.

The reason is the overly tight fiscal policy that’s kept unemployment a lot higher, and beat down the private sector.

And best I can tell, it’s not that public sector employees are earning too much (with a few anecdotal exceptions), it’s that because the economy is so bad, private sector employees aren’t earning what they might in a good economy.

The obvious answer to me.
Instead of trying to drag down public sector compensation to today’s depressed private sector levels, which also happens to further hurt the private sector at exactly the wrong time,
I’d rather see us restore a full employment economy (like we had in 1999-2000)
and let the good times bring up private sector wages and benefits, which, in a good economy, surpass public sector wages and benefits.

But no one is even considering that option.
Because they all agree:
The US has run out of money.
And now must borrow from the likes of China in order to spend
And leave the tab to the grandchildren.
And Social Security and Medicare are bankrupting the nation.
And the deficit is taking away our savings starving private investment.
And that the US could be the next Greece if we don’t get our fiscal house in order NOW.
And all the rest of that kind of nonsense.

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U.K. Construction Grew Fastest in Eight Months in February

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While the austerity measures will bite, in the UK, like much of the world, automatic fiscal stabilizers (rising transfer payments and lower tax revenues) got their deficits up high enough to reverse the downturns in GDP, and deficits remain high enough for modest growth.

The UK had weather issues in December, which are reversing.

As the austerity measures continue to come on line, they will drain off some of the aggregate demand being added by the counter cyclical deficits and keep a damper on growth.

It’s just a guess, and there are other factors as well (oil prices, China slowdown, etc.) but I suspect the actual slowdown from the austerity is still down the road a piece.


UK Headlines:

U.K. Construction Grew Fastest in Eight Months in February
King Says Raising Rate to Make a Gesture Is Self-Defeating
RBC Says Stronger Pound Highlights View BOE’s King Faces Defeat
UK House Prices Stage Surprise Rise as Mortgage Approvals Also Up

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US Budget Gap Is Top Worry for NABE Economists

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So much for their legacies:

US Budget Gap Is Top Worry for NABE Economists

February 28 (Reuters) — The massive U.S. budget deficit is the gravest threat facing the economy, topping high unemployment and the risk of inflation or deflation, according to a survey of forecasters released Monday.

The National Association for Business Economics said its 47-member panel of forecasters increased its estimate for the 2011 federal deficit to $1.4 trillion from $1.1 trillion in its previous survey in November.

“Panelists continue to characterize excessive federal indebtedness as their single greatest concern,” with state and local government debt the second-biggest worry, the survey said.

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the Mideast, the Saudis, and our markets

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First, I’ve been pretty quiet on the mideast goings ons.
I’ve been watching intently from the time Egypt made headlines,
and have yet to see anything of particular consequence to us, beyond oil prices.

I’ve yet to come up with any channel to world aggregate demand, inflation, etc. apart from oil prices.

Seems all moves in stocks and bonds have been linked directly or indirectly only to actual and potential changes in crude oil and product prices.

And the mainstream has yet to realize that ultimately the Saudis- the only producer with excess capacity, continues as price setter, at least until their excess capacity is gone.

So the price of crude oil remains set by decree, and not market forces.
And markets don’t yet seem to know that.
Credit the Saudis for outsmarting the world on that score.
They say they don’t set prices, but let the market set price, as they only set spreads to benchmark market prices they post for their refiners.
The world completely misses the simple difference between the Saudi’s reaction function as a price setter, and prices set competitively in the market place.

That’s like the Fed saying they don’t set $US interest rates, because they have a reaction function that guides them.

So what does that mean?

It means the price of crude will come down only if the Saudis want it to come down (assuming they do have excess capacity).

And my best guess is that their survival strategy includes a lower price of oil.

They will play the maestro with grand gesture and international ‘faux diplomacy’ with ‘high level’ behind the scenes goings ons with pledges to come to the rescue with promises of production increases to replace any lost output due to the crisis, making it clear that they are going the extra mile and taking extraordinary measures to ensure the western economies both won’t see any supply disruptions and prices will be contained. Making it clear that we owe them for their selfless, gargantuan, efforts and expenditures of political capital on our behalf.

It’s all a big show to ingratiate themselves to the West in the hopes of getting the western support needed to sustain their position of power.

And the west will never realize that prices went up only because the Saudis raised their posted prices under cover of their reaction function that the west mistakes for ‘market forces,’ and that prices will go down only as the Saudis simply lower their posted prices, as they continue to play us for complete fools.

Much like China does to us because we think we need to sell our Tsy secs to fund our federal spending.

And with lower crude prices we go ‘risk off’ and much of the recent moves in other markets reverse.

The other possibility is that the Saudis don’t cut price, maybe because they decide they want the increased revenues to sustain control domestically with increased distributions to their population.

One way or another, it’s all their political decision, and we don’t even understand how it works, which reduces the odds that whatever influence we might have will be used to our ultimate benefit.

Before the early 1970’s the price of oil was set by the Texas Railroad Commission, who kept it relatively low and stable, fueling growth with reasonable price stability, while govt policy fostered relatively high levels of employment and low output gaps.

Since the hand off to the Saudis in the early 1970’s, when circumstances allowed them to take over as swing producer/price setter, prices have increased dramatically with very high levels of volatility, disrupting the world order and fostering today’s very high levels of unemployment and massive output gaps, as govts struggle with fears of inflation and seemingly no understanding of the process that’s got us into that mess.

And now with the world turmoil perhaps largely a function of mass unemployment, and govts with no idea how to keep that from happening, the pendulum is shifting from order to chaos.

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Testimony from Chairman Bernanke

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“If government debt and deficits were actually to grow at the pace envisioned, the economic and financial effects would be severe,” Federal Reserve Chairman Ben S. Bernanke told the House Budget Committee Feb. 9. “Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on U.S. output, incomes, and standards of living.”

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