U.K. Unemployment Rate Hits 9-Month Low, Defying Recession

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More hints from europe that deficits may be high enough to support a bit of GDP growth?

Euro-Region Construction Output Advanced in May, Led by Germany

By Simone Meier

July 18 (Bloomberg) — Euro-area construction output rose in May, as gains in Germany and Portugal offset declining production in Italy, Spain and the Netherlands.

Construction in the 17-nation euro area advanced 0.1 percent from April, when it dropped 3.7 percent, the European Union’s statistics office in Luxembourg said today. From a year earlier, construction output declined 8.4 percent.

In Germany, Europe’s biggest economy, construction output increased 3.1 percent from April, when it fell 5.5 percent, today’s report showed. Portugal and France reported increases of 3.6 percent and 0.4 percent, respectively. In Italy, output fell 1.4 percent from the previous month, when it dropped 4.3 percent. Spanish output slumped 3.3 percent after a 3 percent drop in April, and the Netherlands had a decline of 0.7 percent.

In the 27-nation EU, output rose 1.6 percent from April, when it fell 6.9 percent. Ireland and Greece are not required to provide monthly data on construction output.

U.K. Unemployment Rate Hits 9-Month Low, Defying Recession

By Scott Hamilton

July 18 (Bloomberg) — U.K. unemployment fell to a nine- month low in the quarter through May. Unemployment based on International Labour Organization methods fell to 8.1 percent of the workforce from 8.2 percent in the period through April. Jobless-benefit claims rose 6,100 in June. The number of people in work climbed 181,000 to 29.4 million with full- time work accounting for most of the increase. London gained 61,000, partly reflecting hiring for the Olympic Games that open on July 27. The claimant-count rate was 4.9 percent. Claims rose 6,900 in May instead of the 8,100 rise initially reported. June was affected by a rule change that forced more lone parents to claim Jobseeker’s Allowance.

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Fed Chairman remains a non trivial obstacle to prosperity

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From Chairman Bernanke earlier today:

The second important risk to our recovery, as I mentioned, is the domestic fiscal situation. As is well known, U.S. fiscal policies are on an unsustainable path, and the development of a credible medium-term plan for controlling deficits should be a high priority. At the same time, fiscal decisions should take into account the fragility of the recovery.

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John’s got it!

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Congress, Not the Fed, Needs to ‘Get to Work’

By John Carney

July 17 (CNBC) — The Senate Banking Committee’s grilling of Federal Reserve Chairman Ben Bernanke just got weird.

Senator Charles Schumer, the New York Democrat, proposed a novel theory of political management of the economy shortly before 11 am Tuesday morning.

The gist of the theory: If the elected branches of government cannot agree to act, the responsibility for the economy falls to the Fed.

Schumer’s argument amounted to the idea that that because disagreements between Republican and Democrats (and, of course, the political ambitions of members of both parties in a presidential election year) are blocking any agreement to provide fiscal relief to the economy, the Fed should “get to work.”

It’s tempting to say that this is the drunk’s theory of the bar tab.

The drunk has been drinking so much he can’t work—and therefore can’t afford to pay his tab. So it’s up to the bartender to pour another cocktail and extend the tab a bit longer.

But this would be insulting to drunks everywhere. The drunk actually understands the economics of the bar better than Schumer understands the difference between monetary and fiscal policy.

The economy right now suffers because the private sector is attempting to save more than it spends, mostly by paying down its enormous debt burden. Because everyone’s income comes from someone else’s spending, reduced overall spending results in income reduction. In our economy, that means higher unemployment.

If the economy is going to grow while households and businesses pay down their debts instead of spending, someone else must take the opposite side of the trade by growing spending more than its income.

With the rest of the world heading toward recession, the only plausible source of this added income is the government. In other words, the government must cut taxes relative to spending (or grow spending relative to taxes) to replace the lost income in the private sector.

What the economy certainly isn’t suffering from right now is a shortage of liquidity or a meager money supply. Which is to say, we’ve reached the limits of what the Fed can do to spur growth. (Although perhaps not the limits of what the Fed can do to fend off a sharp turn downward in the economy.)

To hear a member of the shirker branch of our government blame the Fed for not doing enough would be laughable if we weren’t living with the consequences of the shirking.

Sen. Schumer—and his fellow lawmakers—are the ones who should “get to work.”

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Another vice presidential candidate

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:(

‘The Dollar Is Going to Go to Hell’: Trump

By Justin Menza

July 17 (CNBC) — The U.S. needs to pay down its debt, and that won’t happen if Federal Reserve Chairman Ben Bernanke “goes wild” with more stimulus, Donald Trump told CNBC’s “Squawk Box” on Tuesday.


“The fact is that the country owes $16 trillion, and we just can’t keep doing this,” Trump said. “The dollar is going to go to hell.”

Trump said the artificial Fed stimulus has done nothing, and the only way to get the country back on track is to start paying down debt.

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The economics of euro zone trade differentials and fiscal transfers

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Trade differentials have been blamed for the euro crisis, implying that that if trade had some how been balanced there wouldn’t have been the kind of liquidity crisis we’ve been witnessing.

While I do recognize the trade differentials, it remains my deduction that the source of the ongoing liquidity crisis is the absence of the ECB (the only entity not revenue constrained) in critical functions, including bank deposit insurance and member nation deficit spending. And I continue to assert that the euro zone liquidity crisis is ultimately obviated only by the ECB ‘writing the check’, as has recently indeed been the case, however reluctantly.

Trade issues within the euro zone, however, will remain a point of economic and political stress even with a full resolution of the liquidity issues, which leads to discussions of fiscal transfers.

Fiscal transfers can take two forms. One is direct payments to individuals, such as unemployment compensation. Another is the placement of enterprises in a region.

The US does both. For example, it funds unemployment compensation and also spends to directly support all federal agencies, including contracting private sector agents for goods and services to provision the federal govt and its agencies.

And here’s where mainstream economics has left out a critical understanding. In real terms, the allocation of the production of goods and services to a region is a real cost to that region.

This is because that region has to supply its labor to the production of output that is directed to the public sector for the mutual benefit of all the regions.

Note that this is not the case with the likes of unemployment compensation, where the payment is made without any ‘real output’ transmitted to the public sector.

For the euro zone, this means that if Germany, for example, located a military production facility in Greece, where Germany got the benefit of the output, in ‘real terms’ Greece would be ‘paying’ for Germany’s military.

This type of thing could work to readily ‘balance’ euro zone trade, at the real expenses of the ‘deficit’ nations.

Which is exactly what happens in the US, for example, when a military procurement expenditure is located in a region of high unemployment.

And yes, I fully appreciate the obstacles to this actually happening, including deficit myths that prevent full employment and politics that need no further discussion, so thanks in advance for not telling me about them!

But the point remains- the trade differentials in the euro zone are not in the least an insurmountable problem, at least not in theory…

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Spanish Banks’ Net ECB Loans Leap to Record 337 Billion Euros

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Seems to me if there was going to be a liquidity problem with the banks the ECB would have already let it happen:

Spanish Banks’ Net ECB Loans Leap to Record 337 Billion Euros

By Emma Ross-Thomas

July 13 (Bloomberg) — Spanish lenders’ net borrowings from the European Central Bank jumped to a record 337 billion euros ($411 billion) in June. Net average ECB borrowings climbed from 288 billion euros in May, the Bank of Spain said. Gross borrowing was 365 billion euros, up from 325 billion euros in May, and accounting for 30 percent of gross borrowing in the whole euro region. Spain saw the biggest outflow of foreign investment in April since the start of the euro, Bank of Spain data show. Non- residents cut their holdings of Spanish bonds to 37.5 percent of the total in May, from 51.5 percent at the end of last year. Spanish banks picked up the slack in the first quarter, before starting to reduce their holdings in April, according to Treasury data.

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Banks Face $6 Billion of Libor Litigation, Morgan Stanley estimates

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The libor scandal is particularly bad, even though not a lot of actual $ gains/losses involved, in that it happened after the financial crisis when there was at least some hope that the surviving major banks had, in general, cleaned up their act. And also at least some hope that the crisis was a wake up call to bank regulators and supervisors.

It’s not that hard to spot. For example, relatively wide libor basis swaps indicate markets are discounting libor settings being away from actual deposit rates by more than typical bid/offered spreads.

Banks Face $6 Billion of Libor Litigation, Morgan Stanley estimates

July 12 (Bloomberg) — Banks being probed for attempting to rig benchmark interest rates could face $6 billion of related litigation costs, analysts at Morgan Stanley estimated. The 16 banks may also lose 4 percent to 13 percent in 2012 earnings per share from regulatory fines on a base case scenario, Morgan Stanley analysts led by Betsy Graseck wrote in a note to investors today. They may also suffer from tighter scrutiny from regulators in response to the Libor investigations, the analysts said.

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Housing still modestly improving?

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The Mortgage Bankers Association said its seasonally adjusted index of mortgage application activity, which includes both refinancing and home purchase demand, fell 2.1 percent in the week ended July 6. The results were adjusted to account for the July 4 holiday.

The MBA’s seasonally adjusted index of refinancing applications fell 3.4 percent, but the gauge of loan requests for home purchases, a leading indicator of home sales, rose 3.3 percent.

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ECB to Ensure That Lenders Have Enough Liquidity, Visco Says

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More constructive hints?

ECB to Ensure That Lenders Have Enough Liquidity, Visco Says

(Bloomberg) The European Central Bank will continue to guarantee sufficient liquidity for lenders and keep up the fight against market fragmentation among the 17 countries that share the euro, Bank of Italy Governor Ignazio Visco said. “The ECB can’t but continue to pursue these objectives,” Visco said today in a speech in Rome. The ECB cut rates to a record low on July 5 on concern the euro area is slipping deeper into a recession. The central bank, headed by Mario Draghi, agreed in June to help nations in distress by acting as a buying agent for sovereign bonds purchased by government-run bailout funds. The rate cut, to 0.75 percent, is an indication of the ECB’s intention to guarantee “adequate monetary conditions” in the euro area, Visco said. “It followed other measures adopted last month designed to continue to ensure necessary liquidity for the banking system and fight the effects of the fragmentation of monetary and financial markets,” he said.

German Finance Minister Asks Court Not to Block Euro Assistance

(New York Times) The German finance minister warned on Tuesday that there would be severe consequences for the euro currency union if this country’s highest court blocks Germany’s recent ratification of two measures for fighting Europe’s financial crisis.

Officials Spar Over Who Will Guarantee Bank Losses

(WSJ) German finance minister Wolfgang Schäuble said that even once the euro zone’s bailout fund has been authorized to directly recapitalize struggling banks, the lenders’ host government should retain final liability for any losses. “We expect that the final liability of the state will remain” even once the banking supervisor is up and running, he told journalists. He added that what mattered was that the bank support wouldn’t add to a country’s debt—something that he said would be possible even under a scenario where the government retained liability for potential losses. Other officials insisted that banks’ host states wouldn’t have to guarantee any support from the bailout fund.

A Euro-Zone Strategy Shift

(WSJ) Finance ministers from the euro zone agreed that Spain need only reduce its deficit to 4.5% of gross domestic product next year, and 2.8% in 2014, in order to avoid financial penalties. The deal, Spanish Finance Minister Luis de Guindos told reporters, had been clinched without fresh demands on fiscal policy from euro-zone partners, although Eurogroup Chairman Jean-Claude Juncker had warned that there would be a thorough examination of every bank that asks for aid. “I repeat it again, and these are fundamental points, these are two completely independent agreements, they are not related in any way because there is no macroeconomic conditionality in the agreement on the memorandum [of understanding],” he said.

Noyer Warns Hollande of France’s ‘Serious’ Economic Weakness

(Bloomberg) France’s unit cost of labor of 34.20 euros an hour compares with Germany’s 30.10 euros, Italy’s 26.80 euros and 20.60 euros for Spain. Unit labor costs in France have increased by about 20 percent relative to Germany since 2000 as French companies implemented the nation’s 35-hour work-week law, according to Coe-Rexecode. “Of all advanced countries, France has registered, since 2000, the sharpest decline in its market share in global exports,” Bank of France Governor Christian Noyer said. “The drop in the number of hours worked and rigidities in working time arrangements have probably played a role” and reviving exports means tackling all sorts of restrictions that hamper activity, he said.

French current account deficit narrows in May

(AFP) The French current account deficit narrowed slightly in May, owing to a smaller shortfall in the trade of goods and a bigger surplus in services, official data showed on Monday. The Bank of France said the current account, which measures all current payments in and out of the country, showed an overall deficit of 4.1 billion euros ($5.3 billion), compared with a 4.4 billion euro shortfall in April. A breakdown of data showed that the deficit in exchanges of goods had decreased to 5.6 billion euros in May from 6.0 billion in April, while a surplus in services grew to 1.9 billion euros from 1.7 billion.

This is not good if/when implemented:

Rajoy Announces 65 Billion Euros in Budget Cuts to Fight Crisis

(Bloomberg) Spanish Prime Minister Mariano Rajoy announced tax increases and spending cuts totaling 65 billion euros in the next two-and-a-half years. Rajoy’s fourth austerity package in seven months will raise the sales levy to 21 percent from 18 percent; scrap a tax rebate for home buyers; scale back unemployment benefits; consolidate local governments and eliminate the year-end bonus for some public workers. The budget cuts are about double those previously announced. Spain’s central government budget deficit swelled to 3.41 percent of gross domestic product in the first five months of the year, approaching the full-year goal of 3.5 percent after the government brought forward transfers to regional administrations and the social-security system.

Spain Agrees to Guarantee Bond Issuance of Cash-Strapped Regions

(Bloomberg) Spain will guarantee bonds issued by regional governments to help them regain access to capital markets and ease a funding squeeze. The program will be “voluntary” for regions and will come with additional conditions on budget deficits, Antonio Beteta, deputy minister for public administration, told reporters. The plan will be presented at a meeting of regional budget chiefs on July 12, he said. “The mechanism aims to make issues more liquid and easier to place on the markets as they have a central-government guarantee,” Beteta said. Regions face redemptions of about 15 billion euros in the second half of the year, according to data on the Budget Ministry’s website.

Spain Says European Rescue for Banks Opens Door to ECB Funding

(Bloomberg) Spain’s FROB rescue fund will distribute bonds issued by the EFSF to the banks, which “can use them at the ECB if they need the liquidity,” Spanish Economy Minister Luis de Guindos told reporters. As part of the agreement for Spain’s 100 billion-euro bank bailout, one or several vehicles will be created to buy assets from lenders at a “reasonable” price, de Guindos said. Those vehicles will issue bonds that will also be eligible at the ECB. Industrywide conditions for the financial assistance include a 9 percent capital requirement, de Guindos said. A first tranche of 30 billion euros is to be used as soon as the end of the month. Remaining details will be clinched in the memorandum of understanding due to be signed on July 20, he said.

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