Category Archives: Inflation

China Causing ‘Growing Frustrations’ With Curbs on Businesses, Locke Says

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So how about all that talk that it’s ‘regulation’ that’s holding back the US economy?

The regulation and govt. ‘interference’ in China is far beyond anything imaginable in the US, yet their growth rates are far beyond
anything imaginable for the US, and they manage higher levels of employment with consumption at only about 35% of GDP.

So what’s the difference?

How about Chinese annual deficits running well over 20% of GDP (state lending is functionally very close to state deficit spending) in the normal course of business?

Much like the US did in WWII?

With similar growth rates?

Ok, so 25% might be a tad too high for the kind of price stability most in the US would prefer.

And so now China is fighting a 6% inflation rate.

Hardly ‘hyper inflation’

And certainly no reason for us not to go to the 12-14% annual deficits we probably need to sustain full employment, given current credit conditions.

In other words, for the size govt. we currently have, we remain grossly over taxed.

China’s Policies Fueling ‘Growing Frustrations,’ Locke Says

 
Sept. 20 (Bloomberg) — U.S. Ambassador to China Gary Locke said the Asian country’s business climate is leading to “growing frustrations” among business and government leaders abroad, planting “seeds of doubt” in the minds of investors.

 
“There is a gap between the goals China identified in its five-year plan and the steps it is taking to achieve them,” Locke told U.S. business executives in Beijing. “Goals like expanding domestic consumption and fostering innovation require an acceleration and expansion of the economic reforms China has undertaken in the last few decades.”

 
Business groups including the Beijing-based American Chamber of Commerce in China, which hosted Locke today, are increasingly concerned that China aims to boost its companies through subsidies and anticompetitive rules at the expense of foreign companies. The European Union Chamber of Commerce in China said this month that discriminatory laws and regulations still impede its members in the world’s second-largest economy.

 
Locke said that foreign businesses face “substantial restrictions” in industries from “aviation to health care to financial services and several others.” To ease investor doubts, Locke said China should abolish restrictive practices like requiring “joint ventures in so many fields” and allowing both local and foreign companies to “make investment decisions without expansive government interference.”

 
Credit Cards

 
Access for financial firms was an area of concern, Locke said, singling out credit cards where he said China’s restrictions had created a domestic monopoly that failed to best serve consumers’ needs. State-owned banks were also skewed toward serving government-sector companies, he said.

 
“A more open and diverse Chinese financial system would help spur China’s economic reform efforts by helping finance the most dynamic firms in the economy and by putting more money in the pockets of the Chinese people through better savings options,” Locke said, according to a copy of the speech handed out to reporters before he spoke.

 
Foreign companies are shut out of industries such as mining, power generation and transportation altogether through China’s policy of selecting “national champions,” he said.

 
China’s policies deny its companies from receiving technology, management skills and jobs that more investment would bring, as well as “creating seeds of doubt in the minds of foreign investors as to whether they are truly welcome in China,” he said.

 
In a report in March, AmCham found 24 percent of respondents to an annual business climate survey said China’s economic reforms had done nothing to improve the environment for U.S. businesses in the country, up from 9 percent who said the same in a poll released last year.

 
No Equal Treatment

 
China’s government hasn’t lived up to Premier Wen Jiabao’s pledge last year that foreign companies would receive equal treatment, the EU chamber said in a report released Sept. 8.

 
Carmakers must take a Chinese partner and are limited to a 50 percent stake in their ventures, while telecommunication companies are effectively shut out from the world’s biggest mobile phone market, the report said. Foreign banks’ ownership of domestic financial firms is capped at 20 percent and overseas wind-turbine makers must tie up with local rivals on the grounds of “national security,” it said.

 
Locke said China’s reform process would be aided by letting its currency, known as the yuan or renminbi, appreciate.

 
Global Responsibility

 
“Allowing the renminbi to appreciate more rapidly would help reduce inflation, including the price of goods and services coming into China, allowing Chinese consumers to buy more with the income that they have,” he said.

 
Locke said China had a responsibility as the world’s second-biggest economy to help revive global growth, adding that reforms and greater market access were “critical to creating jobs in America.”

 
Wen this month said developed nations shouldn’t rely on China to bail out the world economy, and must cut deficits and free up their own markets. The U.S. should “ditch” protectionist measures and “open their arms” to Chinese investments, Xinhua News Agency said in a commentary today.

 
‘Houses in Order’

 
“Countries must first put their own houses in order,” Wen said Sept. 14 at the World Economic Forum in the Chinese city of Dalian. “Developed countries must take responsible fiscal and monetary policies.”

 
After serving as President Barack Obama’s commerce secretary, Locke was named as ambassador after Jon Huntsman resigned in April to run for the 2012 Republican presidential nomination.

 
Locke, 61, a former governor of Washington from 1997 to 2005, also represented the state in Congress from 1982 to 1993. From 2005 to 2008, he was a partner at Davis Wright Tremaine LLP, a business and litigation law firm that represents clients in the U.S. and China.

 
The “single largest barrier” to improved U.S.-China cooperation is the “lack of openness in many areas of Chinese society — including many areas of the Chinese economy,” Locke said.

To contact the editor responsible for this story: Peter Hirschberg at phirschberg@bloomberg.net

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Pilkington highlights Mosler’s ECB distribution proposal

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thanks, well researched and much needed!!!

http://blogs.independent.ie/independent_blog/2011/09/economic-solutions-political-impediments-and-the-circus-that-we-call-europephilip-pilkington-conflicting-messages-coming-ou.html

FINANCIAL CRISIS: Deeper malaise at heart of the European project

 
PHILIP PILKINGTON

Conflicting messages coming out of euroland of late. On the one hand we have a German constitutional court ruling that any permanent action on behalf of the European authorities to stymie the current crisis and pose a risk to other countries are unconstitutional. Add to that Angela Merkel saying that eurobonds are ‘absolutely wrong’. Yet on the other hand, we have Jose Manuel Barroso, the president of the European Committee, coming out saying that a eurobond proposal is imminent. Clearly these two official statements conflict with one another.
Lying behind this latest conflict in euroland is a much deeper conflict: that between full fiscal union and breakup. Eurobonds are seen by many in the EU as the first step toward full federal integration. Sure, the proponents tell us that eurozone-wide bonds would only be issued to back the currently deteriorating position of the sovereign nations in fiscal difficulty, but it’s obvious to all that institutional reforms would have to follow.

 
Eurobonds would effectively centralise the burden of government expenditure in the eurozone. All states would back the eurobond and all states would, in turn, be backed by the eurobond. Sovereign government debt would gradually wane in importance as the European-wide bonds rose in prominence. With this would come the debate over how fiscal policy should be managed in the union. If states no longer bear the ultimate burden of financing themselves why should they be allowed to make their own taxing and spending decisions?

 
The trajectory then appears inevitable. Those in the eurozone who want to centralise fiscal policy would soon be front and center stage in the political debate. And those opposed to such centralisation would be equally to the fore. The former would argue that since member states were no longer financing themselves, fiscal responsibilities need to be given to a higher authority. While the latter would make the case that having some eurocrat in Frankfurt or Brussels involved in micromanaging the decisions of a nation state’s taxing and spending is a ghastly prospect — they might allege that it is reminiscent of the old Soviet centralised bureaucracy; now less a Politburo than a Politeuro.

 
Those opposed to centralisation would probably end up calling for the break up of the eurozone proper — that, after all, would be the logical end point of their argument.

 
So, what on earth should we do? The dangers of having a centralised fiscal authority are obvious; but the break up of the eurozone would prove remarkably unpleasant for all those involved.

 
The central question is what the eurocrats would do once they had control over fiscal policy. If they continued on as they are — as arch-conservatives geared only toward curbing inflation, even when such inflation simply doesn’t exist — they would destroy the eurozone. Simple as. Trade imbalances and an uneven economic landscape necessitate government surpluses to be run in some countries and deficits in others. To think otherwise is to think in moral terms rather than economic terms. But if the eurocrats did continue in their highly conservative — dare I say, unrealistic — tracks, we would have constant fiscal crises on our hands and eventually member states who were not allowed to run necessarily loose fiscal policies would drop out of the union.

 
What the eurozone needs is a central authority with an extremely flexible fiscal policy. Without this the project is doomed from the outset and we may as well just start looking for the cheapest way to get out now before further costs are incurred.

 
In fact, the eurozone already has an institution that can effectively allow such a flexible fiscal policy to be pursued: the ECB. The ECB, like it’s US cousin the Federal Reserve, has control over the issuance of currency and in that capacity it can effectively pay for anything it wants — provided, of course, that which it pays for is denominated in the currency it issues (Euros, in the case of the ECB). This simple fact comes as a shock to many, but consider what former Federal Reserve chairman Alan Greenspan recently said regarding the Fed:
“The United States can pay any debt it has because we can always print money to do that,” said Greenspan in an interview with Meet the Press recently.

 
Well, the same is true for the ECB. They have the legal mandate to create as much currency as they see fit and that currency can be effectively used to pay for anything that is denominated in said currency; that includes national government debt. It follows from this that the ECB can, in fact, create any amount of money that can then be used to retire the government debt of those sovereigns now facing default and crisis. This is a much simpler solution than eurobonds because it doesn’t pose any risk to other eurozone countries. And it can also be used in order to ensure fiscal flexibility in the future and ensure that the eurozone prospers rather than collapses.

 
This proposal was originally put together by economist and government bond expert Warren Mosler. Here’s how it would work:

 
The ECB would create €1trn on an annual basis and distribute it among the eurozone nations on a per capita basis. So, Germany, since it has a larger population, would get more than, say, Ireland. Each country would then use their newly acquired funds to begin paying down their stock of public sector debt. When they reached a reasonable level of debt — say 60% debt-to-GDP — the transfers would either discontinue or could be renegotiated to allow compliant countries to spend them (provided, of course, there are no major inflationary pressures in the eurozone at the time).

 
Since the payments take place on an annual basis the ECB and other European authorities could use them as leverage over the sovereign nations to ensure that they complied with responsible deficit targets. This would be far more effective than the current system — which effectively fines member-states for non-compliance — as the penalties for non-compliance would be immediately visible and would not require time-consuming legal and administrative action.

 
This all seems so simple, so what are the objections? Why won’t the ECB do this and solve the crisis?

 
Well, economically speaking the problems are basically non-existent. We’ve learned from the Quantitative Easing (QE) programs in the US and Britain (as well as in Japan some years ago) that so-called ‘debt monetisation’ is not inflationary. Buying up government debt certainly increases the amount of bank reserves in the private sector and according to the old economics textbooks this should lead to increased lending and thus inflation. But such inflation simply has not occurred in either country (yes, there is some inflation in Britain right now but this is largely due to oil/food price increases and VAT rises — it is NOT ‘demand-pull’).

 
This revelation is both surprising and important. Recent studies by economists working within central banks show that mainstream economists have basically been getting the whole thing wrong. In reality expanding bank reserves will not increase lending and so it is not inherently inflationary. Consider this paper by economists at the Bank of International Settlements (BIS) — known among economists as ‘the central bank’s central bank — published in late 2009. The authors write:

 
“The preceding discussion casts doubt on two oft-heard propositions concerning the implications of the specialness of bank reserves. [These are] first, [that] an expansion of bank reserves endows banks with additional resources to extend loans, adding power to balance sheet policy. Second, there is something uniquely inflationary about bank reserves financing.”

 
The authors continue:

“In fact, the level of reserves hardly figures in banks’ lending decisions. The amount of credit outstanding is determined by banks’ willingness to supply loans, based on perceived risk-return trade-offs, and by the demand for those loans. The aggregate availability of bank reserves does not constrain the expansion directly.”

 
So much for the inflation argument!

 
The other argument is that such debt monetisation might lead to a devaluation of the currency in question. If there are more Euros floating around the banking system, even if they aren’t spent into circulation, their value will decrease. In actual fact there is no evidence of any direct link between exchange-rate depreciation and the creation of money.

 
This doesn’t mean that depreciation may not occur due to monetisation but it does mean that we have to consider other variables. For example: what are the trade-off effects? If no action is taken and the eurozone crisis continues to spiral out of control will the currency depreciate anyway? You can bet your socks on that! So, exchange-rate issues are far more complex than simply ‘more money = devalued currency’.

 
In fact, the objections to this sort of plan are typically moral rather than economic in nature. Many commentators have begun to realise that a great deal of the discourse that has cropped up around the eurocrisis is not actually economic at all — it is moral. This is phenomenon about which economic commentators can say little, although it is a very real problem. However, if such moralising leads the eurocrats and the politicians to fiddle while Rome burns we may very well see the ECB creating bank reserves to backstop the banks anyway if a default occurs. Such will be messy. And we have seen it can be avoided. But what can one do? If nothing else necessity is certainly the mother of invention.

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China- managing to avoid a hard landing while fighting inflation?

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So far looks like a soft landing, as they seem to be successfully regulating state lending, which in China is akin to deficit spending,
sufficiently to slow things down just enough to cool demand just enough to take the edge off of their inflation problem.

So while ‘it’s not over until it’s over’ so far it’s looking promising.

China consumer, business sentiment slips: survey
Sept 16 (MarketWatch) — Chinese households and entrepreneurs are beginning to feel less upbeat about the future, but analysts are divided over whether the mood shift could soon warrant moderate policy easing as authorities seek to cushion the economy from a rapid slowdown.

Sentiment among households, entrepreneurs and bankers weakened in the most recent quarter, according to a survey by the People’s Bank of China released earlier this week.

Households’ inflation expectations nudged up to 74.8 from 72.2, while the outlook for income expectations and job expectations declined 50.3 from 52.1, according to the PBOC survey.

Meanwhile, confidence among bankers eased to 54.9 from 57. Most of those polled believe further monetary-policy tightening was on the way, with interest rates set to rise in the fourth quarter.

Entrepreneurs’ confidence was battered by higher input costs, slowing orders, and harder-to-access credit. Business confidence fell to 70.2 from 75.8 in the prior quarter.

Daiwa Capital Markets analysts said the deteriorating sentiment suggests the PBOC will allow domestic banks to ramp up new lending by an additional 500 billion yuan ($78.32 billion) in the fourth quarter.

The higher loan growth should be seen as “fine tuning” of policy toward a “more balanced approach,” the Daiwa analysts said.

“The purpose of this loosening is to avoid a hard landing, rather than to engineer another economic boom,” Daiwa said in a note Thursday.

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CH News – 09.13.11

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Ok news so far for August, some slowing but no sign of a hard landing yet!

On Tue, Sep 13, 2011 at 8:03 AM, Evelyn Richards wrote:
 

HIGHLIGHTS
-China’s retail sales up 17% in Aug
-China’s fixed asset investment up 25% in Jan-Aug
-Yuan Forwards Decline Most in a Month on Greece Debt Concern
-China Aims to Play Role in Stabilizing Europe, Researcher Says
-China August Fiscal Revenue Rises 34.3% on Year, Ministry Says
-China Called on as Emergency Lender as Italy Faces Crisis
-China unlikely to loosen monetary policy
 

China’s retail sales up 17% in Aug
Sep. 13, 2011 (China Knowledge) – China’s retail sales reached RMB 1.47 trillion
in August this year, up 17% year-on-year, said the National Bureau of
Statistics.

Total retail sales in urban areas rose 17.1% year-on-year to RMB 1.28 trillion
last month, while retail sales in rural areas rose 16.4% to RMB 192.2 billion in
the same period.

Retail sales in the catering industry also grew and increased to 16.7%
year-on-year to RMB 171.7 billion in August, while retail sales of consumer
goods rose 17% to RMB 1.3 trillion.

Last month, the retails sales of automobiles continued to top the country’s
retails sales list, reaching RMB 174.6 billion, up 12.4% year-on-year, while
retail sales of oil and related products came in second, hitting RMB 126.7
billion, with a growth of 38.4%.

In the first eight months of this year, the country’s retail sales totaled RMB
11.49 trillion, 16.9% more than in the corresponding period of last year.
Retails sales of automobiles grew 14.9% to RMB 1.29 trillion during the period,
and retail sales of oil and related products amounted to RMB 928.2 billion,
39.5%.
 

China’s fixed asset investment up 25% in Jan-Aug
Sep. 13, 2011 (China Knowledge) – China’s total fixed asset investment surged
25% year on year to RMB 18.06 trillion in the first eight months of this year,
according to statistics released by the National Bureau of Statistics.

The growth rate was 0.4 percentage points lower than that in the first seven
months.

Last month, the country’s fixed asset investment climbed 1.16% from July.

Fixed asset investment in primary industry saw a 23% increase, hitting RMB 417.6
billion, while investment in secondary and investment in tertiary industry grew
27% and 23.6% year on year to RMB 7.92 trillion and RMB 9.73 trillion,
respectively, according to the latest statistics.

The country’s investment in the industrial sector jumped 26.6% year-on-year to
RMB 7.71 trillion, including RMB 638.9 billion in the mining sector and RMB 6.24
trillion in the manufacturing, up 15.9% and 32.2% year on year, respectively.
The power, gas and water producing and supplying industry saw its fixed-asset
investment climb 1.9% year on year to RMB 833.5 billion in the first eight
months.

In the first eight months, investment in real estate development surged up 33.2%
year on year to RMB 3.78 trillion.

Meanwhile, fixed asset investment in China’s eastern, central and western areas
booked notable year-on year increases of 22.6%, 30.1% and 29.4%, respectively.
 

Yuan Forwards Decline Most in a Month on Greece Debt Concern
Sept. 13 (Bloomberg) — China’s yuan forwards dropped the
most in a month amid speculation Greece is nearing default,
which may prompt policy makers to slow the currency’s
appreciation.
The People’s Bank of China set the daily reference rate
0.09 percent lower today, the most in almost four weeks, as
Asian currencies weakened. The chance of a default by Greece in
the next five years has soared to 98 percent as Prime Minister
George Papandreou fails to reassure investors that his country
can survive the euro-region crisis, credit-default swaps showed.
“What you may see actually is a weaker pace of
appreciation,” said Leong Sook Mei, regional head of global
currency research at Bank of Tokyo Mitsubishi UFJ Ltd. in
Singapore. “There was lots of risk aversion with regards to the
Greece issue. The overall trend of appreciation won’t stop as
yet until we see decisive signs of Chinese growth coming off and
inflation easing.”
Twelve-month non-deliverable forwards slid 0.33 percent to
6.3305 per dollar as of 4:58 p.m. in Hong Kong, according to
data compiled by Bloomberg. The premium to the onshore spot rate
was 1.1 percent, compared with 1.2 percent yesterday.
The yuan dropped 0.17 percent to 6.3991 per dollar in
Shanghai, according to the China Foreign Exchange Trade System.
In Hong Kong’s offshore market, the yuan declined 0.02 percent
to 6.3855.
A central bank statement yesterday that inflation is still
too high is “hawkish,” Tim Condon, head of Asia research at
ING Groep NV, said in an e-mailed note today.
Policy makers will want to see a second consecutive month
of lower headline inflation before declaring “victory,” Condon
wrote. He reiterated the bank’s call for one more 25-basis point
increase in benchmark interest rates by the end of the year.
China’s inflation eased in August, rising 6.2 percent from
a year earlier, compared with 6.5 percent in July, which was the
fastest since June 2008.
 

China Aims to Play Role in Stabilizing Europe, Researcher Says
Sept. 13 (Bloomberg) — China is playing its role as a
responsible major world economy and is trying to help stabilize
global confidence by supporting European governments, Zhang
Yansheng, a researcher affiliated with the nation’s top economic
planning agency, said today.
Chinese policy makers are thinking in a “global context”
and about the need to prevent a “domino effect” in the debt
crisis, Zhang said in Beijing today when asked to comment on
reports that China is in talks to make investments in Italy that
may include government bonds. If Italy “falls” it may drag
down Europe, the world and China’s economy, he said.
There is a limit to what China can do to help, Zhang said.
Zhang, who is a researcher at the Institute of Foreign
Economic Research affiliated to the National Development and
Reform Commission, said he was giving his own views on the
matter.
 

China August Fiscal Revenue Rises 34.3% on Year, Ministry Says
Sept. 13 (Bloomberg) — China’s August fiscal revenue rose
34.3 percent from a year earlier to 754.6 billion yuan and
fiscal expenditure rose 25.9 percent to 807.7 billion yuan,
according to a statement on the Ministry of Finance’s website
today.
Fiscal revenue for the first eight months this year rose
30.9 percent to 7.4 trillion yuan, the statement said.
 

China Called on as Emergency Lender as Italy Faces Crisis
Sept. 13 (Bloomberg Businessweek) — China’s status as the fastest- growing major economy and holder of the largest foreign-exchange reserves lured another bailout candidate as Italy struggles to avoid a collapse in investor confidence.

Italian officials held talks in the past few weeks with Chinese counterparts about potential investments in the country, an Italian government official said yesterday, adding that bonds weren’t the focus. Finance Minister Giulio Tremonti met with Chinese officials in Rome earlier this month, his spokesman Filippo Pepe said by phone today, declining to say exactly when the talks took place or what was discussed.

Foreign Ministry spokeswoman Jiang Yu, asked about buying Italian assets, said Europe is one of China’s main investment destinations, without specifically mentioning Italy.

Italy joins Spain, Greece, Portugal and investment bank Morgan Stanley among distressed borrowers that turned to China since the 2007 collapse in U.S. mortgage securities set off a crisis that widened to engulf euro-region sovereign debtors. Stocks rose on the potential Chinese investment in Italy even as previous commitments failed to have a lasting impact.

“It’s a clear pattern of China’s intention to help stabilize the euro area,” said Nicholas Zhu, head of macro- commodity research for Asia at Australia & New Zealand Banking Group in Shanghai and a former World Bank economist. “The benefit to China is that it will help in the perception of host countries if China is viewed as a responsible stakeholder in the global community.”

Bond Auction
Italy today is auctioning as much as 7 billion euros ($10 billion) of bonds to help pay for 14.5 billion euros of bonds maturing on Sept. 15. The euro region’s third-largest economy sold 11.5 billion euros of bills yesterday and priced its one- year notes to yield 4.153 percent, up from 2.959 percent at the previous auction last month.

The yield on Italy’s 10-year bond rose to 5.69 percent as of 10:01 a.m. in Rome, pushing the spread with the equivalent German securities up 13 basis points to 396 basis points. The MSCI Asia Pacific index of stocks advanced 0.3 percent as of 4:50 p.m. in Tokyo after the Standard & Poor’s 500 index gained 0.7 percent overnight.

Chinese Image
For China, any purchases of European debt may allow the world’s largest exporter to be seen as helpful as it rebuffs calls to allow its exchange rate to appreciate at a faster pace. The world’s second largest economy has amassed record currency reserves of $3.2 trillion by selling yuan to limit gains.

Chinese policy makers are thinking in a “global context” and about the need to prevent a “domino effect” in the European debt crisis, Zhang Yansheng, a researcher affiliated with the nation’s top economic planning agency, said today.

China’s central bank referred questions to the State Administration of Foreign Exchange, which didn’t respond to a request for comment. China Investment Corp., the nation’s sovereign-wealth fund, also didn’t respond.

Italy’s bond-yields rose to a euro-era record last month as the region’s sovereign debt crisis spread from Greece, the first to receive a European Union-led bailout. Prime Minister Silvio Berlusconi’s government rushed a 54 billion-euro austerity package to convince the European Central Bank to buy its debt.

Redemptions
Even so, the size of Italy’s debt — at 1.9 trillion euros more than Spain, Greece, Ireland and Portugal combined — leaves it vulnerable to any rise in borrowing costs as it refinances maturing securities. The country still needs to sell about 70 billion euros of debt this year to cover its deficit and finance redemptions.

“We have heard this story before with regard to the likes of Spanish and Portuguese bonds, and in the end it was ECB buying and EU bailouts that seemed to have taken place rather than anything with a Chinese influence,” Gary Jenkins, a strategist at Evolution Securities in London, wrote in a research note.

Any Chinese purchases of euro-region debt to date haven’t produced a lasting cut in yield premiums for Greece, Portugal or Spain.

The extra yield investors demand to buy Greek 10-year debt over German bunds is about 23 percentage points, up from 14 percentage points three months ago. The equivalent spread for Portugal over Germany is 9.5 percentage points, up from 7.7 points over that period. Spain’s gap rose to 3.6 points from 2.5 points.

Too Big
“The issue with Europe is bigger than China alone can help with,” said Ju Wang, a fixed-income strategist at Barclays Capital in Singapore, adding that Italy’s debt load alone is a sum exceeding half the Chinese foreign-exchange reserves. “China probably will continue to help to shore up the euro, but its involvement in direct purchases of troubled Europe debt is unlikely to be too aggressive.”

If Italy “falls” it may drag down Europe, the world and China’s economy, said Zhang, a researcher at the Institute of Foreign Economic Research affiliated to the National Development and Reform Commission.

Japanese Finance Minister Jun Azumi said today that European policy makers should decide themselves whether they need fiscal assistance from Japan. U.S. Treasury Secretary Timothy F. Geithner will travel to Poland on Sept. 16 to participate in a meeting of European government finance officials trying to contain the region’s debt crisis.

‘Helping Hand’
Premier Wen Jiabao said in June that China can offer “a helping hand” to Europe by buying a limited volume of sovereign bonds. The Asian nation pledged that month to buy Hungarian government bonds and agreed to extend a 1 billion euro loan for the financing of development projects in the European country that needed an International Monetary Fund-led bailout in 2008.

Spain’s prime minister secured a Chinese pledge to invest in his nation’s faltering savings banks and in government debt on an April visit to Beijing.

In October, Wen said China will buy Greek bonds to support Greece’s shipping industry, while Chinese state-run banks agreed to $267.8 million in loans to three Greek shippers. President Hu Jintao visited Portugal in November and said China is “available to support, through concrete measures, Portuguese efforts to face the impacts caused by the international financial crisis.”

Diversification
Any Chinese purchases of euro-denominated debt may help it diversify its reserves away from dollars. The biggest foreign owner of U.S. government debt has doubled its holdings of Treasuries in the three years through June to about $1.17 trillion.

China is playing a “white knight” role in assisting Europe and buying itself goodwill that will enable it to purchase more sensitive European assets such as technology companies, according to Stamford, Connecticut-based Faros Trading in a June report. The European Union still has an arms embargo on China, imposed after the Tiananmen Square massacre in 1989.

Some of China’s investments have returned losses. China Investment Corp. paid $3 billion for a 9.4 percent stake in private equity firm Blackstone in 2007 at a 4.5 percent discount to its initial public offering price of $31. The stock traded at $12.31 yesterday, which translates to a loss of more than $1.7 billion loss for China, according to data compiled by Bloomberg.

CIC, as the wealth fund is known, widened its investment horizon to 10 years from five years, the company said in July.

“They are trying to be helpful by diversifying a little within the euro zone community,” Michael Spence, a Nobel laureate in economics, said while attending a conference in Beijing today. “With relatively high yields, if there is a credible plan in Italy — Italy has very low private debt, its public debt is relatively stable if they adopt sensible policies — so could be quite a good investment as well.”
 

China unlikely to loosen monetary policy
Sept 13 (The Australian) – CHINA’s central bank says stabilising prices remains its priority, reinforcing signs that Beijing is unlikely to loosen the reins on the world’s No. 2 economy any time soon despite mounting global uncertainties.

In a statement last night, the People’s Bank of China also gave fresh acknowledgment that its traditional measuring tools have failed to keep up with recent changes in the Chinese financial system. The bank said it is considering issuing an adjusted version of its benchmark measure of the supply of money in the economy to help plug the resulting gaps.

The PBOC’s statement came after economic data over the previous three days showing growth and inflation both easing somewhat, but remaining strong.

The data reinforced a growing consensus among economists that Beijing has likely pressed pause on any big monetary policy moves — after a series of rate increases over the last year — as it balances concerns about the weakness in advanced economies like Europe and the US against ongoing wariness over consumer prices at home.

“There is some control over the causes of rising prices, but they haven’t been eliminated,” the PBOC said last night. “Inflation remains high and stabilising prices remains the top macro-control policy.” The bank said China needs to continue its “prudent” monetary policy and maintain steady and appropriate credit growth.

Data issued by the PBOC on Sunday showed that money-supply growth slowed further last month, which the central bank said was in line with its “prudent” monetary policy. China’s broadest measure of money supply, M2, was up 13.5 per cent at the end of August from a year earlier, slower than the 14.7 per cent rise at the end of July, and below economists’ expectations of 14.5 per cent.

But the PBOC’s statement last night also said it is researching the addition of an “M2-Plus” measure of money supply, because the current M2 measure — which gauges bank deposits and cash in circulation — doesn’t capture funds in wealth management products, which have expanded dramatically this year. That means the M2 readings have understated the total growth in money, which is a factor in inflation.

“The official M2 growth number has become a little less reliable than it once was,” said Standard Chartered economists Li Wei and Stephen Green in a research note last week.

The PBOC noted that growth in lending hasn’t been slow so far this year, pointing out that bank lending in August was up about 10 billion yuan ($1.5bn) from the same month last year, when monetary policy was still loose.

“Overall liquidity conditions are appropriate and banks’ provision levels are normal,” the PBOC said. China’s financial institutions issued 548.5bn yuan of new yuan loans in August, up from 493bn yuan in July and above economists’ expectations of 500bn yuan.

China’s consumer price index rose 6.2 per cent in August from a year earlier, slowing from July’s 6.5 per cent increase, which was the fastest rise in more than three years.

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China punishes state lenders for lending too much

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While lending was up in August, helping to sustain the economy and avoid a hard landing, seems that might not be repeated in September:

China Bank Lending Quickens as Tightening Relaxes

China’s bank lending quickened to 548.5 billion yuan in August, rebounding from a seven-month low of 492.6 billion yuan in July, due to a slight relaxation in Beijing’s credit tightening campaign.
 

But inflation, not growth, remains the top concern for Beijing and China’s central bank is unlikely to alter its current “prudent” monetary policy stance, analysts said.
 

“August lending was stronger than expected, but it’s too early to say that the central bank is ready to relax,” E Yongjian, an economist with the Bank of Communications in Shanghai, said.
 

“As inflation is relatively high and the external environment remains uncertain, the central bank is expected to maintain its current stance, but it is unlikely to take any big moves like an increase in interest rate or the required reserve ratio,” he added.
 

Sources told Reuters earlier that the People’s Bank of China (PBOC) has punished some state lenders with “designated bills” for lending too much in August.
 

China’s broad money supply, M2, rose 13.5 percent, slowing down further from 14.7 percent in July, the central bank said on Sunday.

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Deflation rearing its ugly head and the euro is up

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Interesting day so far.
Stocks down, interest rates down, commodities down, including gold (seems the found Hugo’s gold?) but the euro is up some, after falling some last week.

With federal deficits too low most everywhere, it’s like a general crop failure, with the question being which crops will go up the most vs each other.

Not easy to say, but the euro has to be a bit of a favorite given the sincerity and intensity of their commitment to austerity/deficit reduction? And their new good buddies, the Swiss, now helping out by buying euro as others buy their currency with their new cap in place.

However lower crude and product prices do help the US more than the rest, so that’s a factor that gives the dollar an edge. And the portfolio shifting/speculation/trend following in illiquid markets can overpower the underlying fundamentals as well medium term.

And the dollar and the euro are seeing bids from China and Japan now and then as those nations work to protect their softening export markets.

My least favorite currency longer term may be the yuan, with its inflation issue and ongoing deficit spending, both direct and via state bank lending, though they too seem to be cutting back some. But until FDI (foreign direct investment) lets up, those ‘flows’ continue to support the yuan.

And commodity currencies are in a class of their own, weakening with weakening commodity prices.

It’s also noteworthy that the deflation is coming at a time when central banks, for all practical purposes, can’t be much more inflationary by (errant) mainstream standards of measurement. Unfortunately, however, it’s not that they are out of bullets, it’s that the presumed lethal live ammo has turned out to be blanks, with mounting evidence that the gun was pointed backwards as well.

The obvious answer is a simple fiscal adjustment- just a few keystrokes on the govt’s computers can immediately restore aggregate demand/employment/output- but they’ve all talked themselves out of that one.

However it’s not total doom and gloom.
For example, the US deficit is large enough to muddle through with decent corporate earnings and a bit of minor ‘job creation’ as well.

And sequentially, GDP is slowly improving: .5 q1, 1.0 q2, and maybe 1-2% for q3.
Good for stocks, not so good for people, but the bar is now set so low and the understanding so skewed that ‘blood in the streets’ isn’t yet even a passing thought, so don’t expect much to change any time soon.

And standby for the ECB writing the next check, no matter how large, to keep that all muddling through as well.

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Claims/Trade/ECB/Fed/swiss/euro

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Seems several reasons Fed unlikely to ‘ease’ further:

GDP continues to move up sequentially since year end

Fed forecasts showing continuing modest growth

Core CPI remains firm

Employment still at least modestly growing (ex Verizon, household sector, etc)

Financial burdens ratios way down indicating the potential for a credit expansion is there.

China and much of the FOMC doesn’t seem to like QE or anything even vaguely related, including long term rate commitments.

Also, with the Swiss ‘peg’ vs the euro, as long as the Swiss remain relatively strong buying the franc, it translates into buying of euro. So this new buyer of euro offers further euro support/deflation to an already highly deflationary environment.


Karim writes:

  • Claims rise 9k to 414k; 400-425k range now holding for about 2mths; not a lot of firing, not a lot of hiring
  • Large drop in trade deficit in July, both nominal and real.
  • Exports rose 3.6% while imports fell 0.2%; supply chain coming back on stream helped industrial exports, while lower oil prices dampened imports
  • Q3 GDP still looking like 2%; forward looking survey measures mixed, with consumer surveys much weaker than business surveys.
  • ECB shifts from ‘inflation risks to upside and policy is accommodative’ to…
  • Inflation risks are ‘balanced’, ‘downside risks’ to growth forecasts (which were reduced), and while policy is still accommodative, financial conditions have tightened
  • While LTROs and SMP help with the transmission of policy, if financial conditions still tighten further, the changed forecasts and biases leave the door open for rate cuts
  • Staff forecasts for inflation were left unchanged at 2.6% for 2011 and 1.7% for 2012; Growth forecasts were cut from 1.9% to 1.6% for 2011, and 1.7% to 1.3% for 2012

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MMT to Obama- Use This Speech!

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

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

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

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

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

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

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

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

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

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

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

So listen up!

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The remaining concern is the federal budget deficit.

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

Interest rates actually came down. And substantially.

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

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

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

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

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

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

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

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

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

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

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

Thank you.

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Posen Says G7 Central Banks Should Do More QE

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He should know better by now. Must be a slow learner.

Posen Says G7 Central Banks Should Do More QE, Reuters Reports

Aug. 31 (Bloomberg) — Bank of England policy maker Adam Posen said central banks in advanced economies should undertake more quantitative easing to aid the global recovery and make it easier for governments to fix their fiscal problems, Reuters reported.

“Additional monetary stimulus is the last line of defence for the advanced economies today,” he said, according to Reuters. Previous asset purchases by the Bank of England and the Federal Reserve had a “positive significant impact.”

Posen also said advanced economies are not facing inflation dangers, Reuters reported, citing an article he wrote for the news agency.

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