China Loan Share at Record Low Shows Financing Risks

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Lending by state banks there- shelling out funds without much concern about getting them back- is functionally a lot like deficit spending here, and both probably have similarly high multiples as well.

So while ‘normal’ deficit spending is reportedly going up in China, temper that by this kind of decrease in ‘shadow’ deficit spending.

China Loan Share at Record Low Shows Financing Risks

January 9 (Bloomberg) — Chinas bank loans as a share of funding in the economy may have fallen to a record low, highlighting the growth of alternative financing channels that have prompted warnings of rising credit risks.

New yuan loans probably dropped 14 percent last month from a year earlier, according to the median projection in a Bloomberg News survey of 37 analysts ahead of data due by Jan. 15. That would give bank lending a 55 percent share of aggregatefinancing for 2012, based on UBS AG estimates, the least in figures dating to 2002.

The decline underscores the waning ability of official loan data to capture the scale of debt in the worlds second-largest economy as borrowers and investors turn to less-regulated, higher-return shadow-banking products. The Peoples Bank ofChina is putting greater emphasis on aggregate financing and the International Monetary Fund says the growth of nonbank credit poses new challenges to financial stability.

Chinas economic performance in 2013 will be significantly affected by how seriously Chinese regulators are going to treat non-bank financing, said Shi Lei, a Beijing- based analyst with broker Founder Securities Co., who has provided research advice to Chinas securities regulator. While a hands-off approach will help the economy, a crackdown would be really bad for growth.

The PBOC lending figures are among December data in the coming days that will show whether an economic rebound that began in September picked up or slowed last month after a seven- quarter growth slowdown. Trade figures due tomorrow may show exports rose at a faster pace and a Jan. 11 report may indicate inflation accelerated.

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Greg Walden to introduce bill to stop U.S. Treasury from creating trillion dollar platinum coins

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More of the blind leading the blind. Either way Treasury only spends what’s authorized by Congress. And all the coin does is shift interest expense from the Treasury to the Fed.

Illogic is clearly a adaptive trait for holding office. As they say in Church, it’s another mysteriously rushed contradiction wrapped in an enema…

Greg Walden plans to introduce bill to stop U.S. Treasury from creating trillion dollar platinum coins to pay bills and expand debt

U.S. Rep. Greg Walden (R-Ore.) today announced plans to introduce a bill to stop a proposal to mint high-value platinum coins to pay the federal government’s bills.

“Some people are in denial about the need to reduce spending and balance the budget. This scheme to mint trillion dollar platinum coins is absurd and dangerous, and would be laughable if the proponents weren’t so serious about it as a solution. I’m introducing a bill to stop it in its tracks,” Rep. Walden said.

“My wife and I have owned and operated a small business since 1986. When it came time to pay the bills, we couldn’t just mint a coin to create more money out of thin air. We sat down and figured out how to balance the books. That’s what Washington needs to do as well. My bill will take the coin scheme off the table by disallowing the Treasury to mint platinum coins as a way to pay down the debt. We must reduce spending and get our fiscal house in order,” Rep. Walden said.

Within the last week, numerous media reports (example here) have suggested that the U.S. Mint could create trillion dollar platinum coins, which would then be deposited into the Federal Reserve to be used to pay the federal government’s bills or avoid hitting the debt ceiling. Rep. Jerrold Nadler, the ranking member of the Judiciary Committee’s Subcommittee on the Constitution, touted the proposal last week (story here). New York Times columnist and Princeton professor Paul Krugman suggested the idea in an article as well (click here). Other leaders in Washington, including House Minority Leader Nancy Pelosi, have urged the President to raise the debt limit unilaterally without permission from Congress.

Representative Walden, a member of the House Republican leadership, represents the Second District of Oregon, which includes 20 counties in the southern, central and eastern regions of the state.

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Comments from Mervyn King on LCR changes

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Global banking rules make no sense at all to me.
Each CB need only mind the banks its insures.

But until that’s understood we have to suffer through this nonsense.

“This was a compromise between competing views from around the world,” Bank of England Governor Mervyn King said at a briefing following yesterday’s meeting. King chairs the Group of Governors and Heads of Supervision, or GHOS, which decides on global bank rules. “For the first time in regulatory history we have a truly global minimum standard for bank liquidity.”

Banks and top officials such as European Central Bank President Mario Draghi pushed for changes to the LCR, arguing that it would choke interbank lending and make it harder for authorities to implement monetary policies. Lenders have warned that the measure might force them to cut back loans to businesses and households.

“The new liquidity standard will in no way hinder the ability of the global banking system to finance a global recovery,” King said. “It’s a realistic approach. It certainly did not emanate from an attempt to weaken the standard.”

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ecb getting there?

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>   
>   (email exchange)
>   
>   On Jan 6, 2013 6:41 AM, Andrea wrote:
>   
>   Some interesting points made by Ulrich Bindseil and Adalbert Winkler (ECB) in
>   their October 2012 paper
>   
>   How about these authors rethinking fiscal policy in the light of this?
>   ;-)
>   

The results of our analysis are as follows:

• A central bank that operates under a paper standard with a flexible exchange rate and without a monetary financing prohibition and other limits of borrowings placed on the banking sector is most flexible in containing a dual liquidity crisis.

• Raising interest rates to attract funding / capital inflows, while being the standard economic mechanism in normal times, may fail to equilibrate demand and supply in a confidence crisis as higher interest rates make it less likely that borrowers will be able to serve the debt. As a result, within any international monetary system characterized by some sort of a fixed exchange rate, the availability of inter-central bank credit determines the elasticity of a crisis country’s central bank in providing liquidity to banks and financial markets, notably government bond markets. Thus, the sustainability of fixed exchange rate systems depends on the elasticity of inter-central bank credit, i.e. the ability and willingness of the central banks of “safe haven countries” to provide loans to central banks of countries in financial distress (gold standard and peg to another country’s currency) and on the elasticity of liquidity provision by the common central bank (monetary union).

• In a monetary union, like the euro area, international arrangements are replaced by a common central bank that provides lender-of-last-resort lending to banks. In the institutional set-up of the euro area where national central banks are in charge of the actual conduct of central bank operations with a country’s banking system, this provision of liquidity is reflected in the “TARGET2 balances”. At the same time, the comparison of a central bank of a euro area type monetary union with a country central bank operating under flexible exchange rates and a paper standard, like the US Federal Reserve, shows that central banks under the former framework have a similar capacity in managing dual liquidity crises as long as the integrity of the monetary union is beyond any doubt.

• Collateral constraints matter systematically under all monetary frameworks. As a result, a central bank confronted with a dual liquidity crisis has to be in a position to adjust collateral constraints in order to enhance the elasticity of its liquidity provision and to limit bank defaults and a deepening of the crisis. If done prudently, this may actually reduce central bank risk taking.

• Banks and securities markets can be subject to a liquidity crisis. However, while lender of last resort activities vis-à-vis banks are a widely accepted toolkit of a central bank, outright purchases of securities have been a controversial tool of central bank liquidity provision in financial crisis since the days of the real bills doctrine. Monetary financing prohibitions (regarding Governments) are a specific case of banning direct lending or primary market purchases of securities, namely securities issued by governments. If the central bank is either not allowed, or it is unwilling to conduct outright purchases of securities, the banking sector – supported by the central bank – can in principle act as the lender of last resort for debt securities markets. However, this is subject to additional constraints, i.e. the banks’ ability and willingness to perform this role. Moreover, it has specific drawbacks as, for instance, the possibility of diabolic solvency loops between banks, the issuers of debt securities, including the government and the real economy may arise.

• Borrowing limits of banks, i.e. quantitative credit constraints deliberately imposed by the central bank to limit the borrowing of banks from the central bank, accelerate a crisis because – if enforced – they signal to banks and markets that at those limits the central bank’s elasticity of liquidity provision ends. As a result, those limits push all banks (potentially) affected into a state of fear of becoming illiquid and hence into a state of strict liquidity hoarding.

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Federal Reserve Bank of New York on payroll tax multiplier

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>   
>   (email exchange)
>   
>   On Fri, Jan 4, 2013 at 1:20 PM, Scott wrote:
>   
>   Apparently payroll tax cuts work. Who knew? (We did.)
>   

Thanks, Scott!
Likewise the expiration might be more of a drag than anticipated.


A Boost in the Paycheck: Survey Evidence on Workers’ Response to the 2011 Payroll Tax Cuts

By Grant Graziani, Wilbert van der Klaauw, and Basit Zafar

Abstract:

This paper presents new survey evidence on workers’ response to the 2011 payroll tax cuts. While workers intended to spend 10 to 18 percent of their tax-cut income, they reported actually spending 28 to 43 percent of the funds. This is higher than estimates from studies of recent tax cuts, and arguably a consequence of the design of the 2011 tax cuts. The shift to greater consumption than intended is largely unexplained by present-bias or unanticipated shocks, and is likely a consequence of mental accounting. We also use data from a complementary survey to understand the heterogeneous tax-cut response.

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Posted in Fed

UK remains hopelessly out of paradigm

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U.K. Labour to Strip Benefits From Unemployed If Job Refused

By Kitty Donaldson

January 4 (Bloomberg) — The U.K.’s opposition Labour Party called for a compulsory jobs guarantee for the long-term unemployed, making state welfare payments dependent on paid employment.

The party’s treasury spokesman, Ed Balls, said the guarantee would initially be for adults who are out of work for 24 months or more, though Labour would seek to reduce this to 18 or 12 months over time. The party said there are currently 129,400 adults over the age of 25 who have been out of work for two years or more, a rise of 88 percent in a year.

To pay for the jobs guarantee, which Balls estimates would cost 1 billion pounds ($1.6 billion), he would restrict tax relief on pension contributions for people earning more than 150,000 pounds a year.

“A One Nation approach to welfare reform means government has a responsibility to help people into work and support those who cannot, but those who can work must be required to take up jobs or lose benefits as a result — no ifs or buts,” Balls wrote in an article for the Politics Home website today. “Britain needs real welfare reform that is tough, fair and that works, not divisive, nasty and misleading smears from an out-of- touch and failing government.”

‘Squeezed Middle’

Labour and Prime Minister David Cameron’s Conservatives are battling to attract what the premier calls the “strivers” and opposition leader Ed Miliband the “squeezed middle” of voters whose wages aren’t rising in line with inflation and who are suffering from cuts in public services.

An overhaul of the welfare system is at the heart of the debate, with the Tories seeking to portray themselves as defenders of hard-working families by cutting the welfare bill, and Labour saying it is protecting the most vulnerable in society. Today’s announcement by Balls seeks to show Labour will also be tough on the long-term unemployed.

The Conservative Party said Balls had already pledged in March last year to spend the 1 billion pounds from pension tax relief to increase tax credits for low-paid workers and families with children.

“We are taking firm action to help the long-term unemployed Labour left behind get back into work,” Conservative Party Chairman Grant Shapps said in an e-mailed statement. “Ed Balls is trying to spend the same money twice. That means more borrowing and more debt — exactly how Labour got us into this mess in the first place.”

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Payroll Recap

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Karim writes:

Overall trend improvement continues in payrolls, with the 155k gain (with +14k in net revisions) in line with the average gain over the past 6mths. The Unemployment rate rose from 7.753% to 7.849% as the household survey gained only 28k jobs while the labor force grew by 192k.

Other Notable Positives

  • Diffusion index rises from 56.6 to 63.2
  • Average hourly earnings +0.3% for second straight month
  • Index of aggregate hours +0.4% for second straight month (major plus for personal income)
  • Median duration of unemployment fell from 18.9 weeks to 18.0

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post cliff notes

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So the main thing that happened was my payroll tax holiday expired (I read that this was the only bipartisan bill passed into law in the last 4 years), which will reduce the average family’s take home pay (both working) by over $200/month.

That’s a lot, and its highly regressive. And about as high multiple as you can get, with a lot of that income is leveraged into car payments
and mtgs. and other debt service.

It all brings us back to very modest GDP growth, maybe a bit of (population adjusted) employment growth, and a bit of top line revenue growth for corporations.

Ok for stocks, not so ok for people trying to work for a living.

And more deficit reduction to come.

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Growth Impact from Yesterday’s Deal

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Karim writes:

The straight Keynsian impact (i.e., assume multiplier of 1) of the measures announced yesterday work out to a 1.25% drag on GDP, mostly felt in the first few months of the year. This reflects the payroll tax rise (about 0.7%), the rise in taxes and tighter rules on deductions for higher incomes (about 0.4%) and Obamacare fees (about .05%).

What remains unknown and could remain a drag just based on uncertainty effects are the 2mth delay in deciding on sequestration cuts (which may or may not happen), and obviously the debt ceiling. Both of these deadlines are likely to occur within 2weeks of each other in late Feb/early March.

Uncertainty has been removed in making lower and middle income tax rates permanent as well as the permanent patch for the AMT.

The current structure for unemployment benefits was extended by a year.

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