Re: More talk of prepherals trouble and euro break-up

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Yes, as well as this:

Pros Say: German Stimulus ‘Irrelevant’

Jan 13 (CNBC) — The euro remained under pressure Tuesday despite the German government approving a second stimulus package worth $64 billion to help Europe’s largest economy.

Experts tell CNBC the rescue package is “irrelevant” and that the euro will remain under pressure ahead of the European Central Bank rate decision on Thursday.

It’s irrelevant regarding economic recovery, but can accelerate the rate of credit deterioration of the German state.

And the falling euro once again distorts USD exposure as a percentage of capital that is expressed in euros.

>   
>   On Tue, Jan 13, 2009 at 8:01 AM, Dave wrote:
>   
>   France and Italy under performing Germany 5
>   bps today and Greece under performing 12 bps
>   in 10yrs
>   
>   DV
>   

Greeks Bearing Gifts

by John Authers

Jan 12 (FT) – The market fears the Greeks, even when bearing gifts. It is also scared about the Irish and the Spanish.

Greece has always been treated as a peripheral eurozone member, not only in geography. Even before last year’s civil unrest, its bonds traded at a significantly higher yield than those of Germany – showing a higher perceived default risk.

A eurozone country defaulting and leaving the euro is close to an
unthinkable event. But Friday’s news from Standard & Poor’s that Greece and Ireland were on review for a possible downgrade, followed on Monday by Spain, left many thinking the unthinkable.

The spread of Greek bonds over German bunds is 2.32 percentage points, almost 10 times its level of two years ago. Spanish spreads on Monday rose above 90 for the first time. An Intrade prediction market future puts the odds on a current eurozone member leaving the euro by the end of next year at about 30 per cent.

And German default swaps cost nearly 10 times as much as they did not long ago as well.

The euro dropped more than 1 per cent against the dollar within minutes of the Spanish news, and is down 9.8 per cent in the last few weeks.

A crisis over Greece might be the euro’s ultimate “stress test” (to
borrow a phrase from Daniel Katzive of Credit Suisse). If the eurozone
could find a way to deal with a default, that might confirm the euro’s
status as the world’s next reserve currency.


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China Dec crude imports up

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China Dec crude imports at 3.38 mln bpd – source

by Jim Bai

Jan 12 (Reuters) &#8212 China’s imported 14.37 million tonnes of crude oil in December, or 3.38 million barrels per day, a source familiar with the data said on Monday.

The rate would be 11.6 percent higher than a year earlier, and 4 percent higher than in November 2008 on a daily basis, according to a Reuters calculation.

The imports would bring China’s annual imports to a record high of 178.89 million tonnes, or 3.58 million barrels per day, a rate 9.6 percent higher than a year earlier.


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Krugman again

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In case you thought Krugman isn’t part of the problem.

From his recent column:

Ideas for Obama

by Paul Krugman

Jan 12 (New York Times) &#8212 OK, I’ll bite — although as I’ll explain shortly, the “jump-start” metaphor is part of the problem.

First, Mr. Obama should scrap his proposal for $150 billion in business tax cuts, which would do little to help the economy. Ideally he’d scrap the proposed $150 billion payroll tax cut as well, though I’m aware that it was a campaign promise.

Money not squandered on ineffective tax cuts could be used to provide further relief to Americans in distress — enhanced unemployment benefits, expanded Medicaid and more.

If he understood non-convertible currency, he wouldn’t make this statement.

First, it’s not a trade off.

Second, tax cuts not spent indicate the tax had no value in reducing demand in the first place.

Third, a tax cut that goes unspent is not ‘squandered’. Government squandering would take the form of wasting real goods and services (which does happen too often but that’s another story), not the funds spent per se.

There is not a finite pot of funds that government can spend. The limits of government spending are inflation tolerance, not any specific quantity. Government can do both tax cuts and relief payments if the political will is there, and if the tax cuts are ‘ineffective’ all the better as other government spending can be higher than otherwise without any extra movement of the inflation needle.

And why not get an early start on the insurance subsidies — probably running at $100 billion or more per year — that will be essential if we’re going to achieve universal health care?

Krugman is contributing to more real damage than the dynamite that funded his nobel prize.

If anyone reading this knows him, please forward, thanks!


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Re: Mike Masters on oil on CBS

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>   
>   On Mon, Jan 12, 2009 at 11:49 AM, Russell
>   wrote:
>   
>   Very compelling argument. Still believe it is the
>   Saudis controlling price?
>   

Has to be, within a range of net demand.

Notice their ‘production increase’ right before the big sell off in July?

>   
>   Makes sense: I remember the Kuwait oil
>   minister saying that he could not explain $140
>   oil. He was not seeing any new demand to
>   drive up price. Everyone said he was lying.
>   
>   A friend was telling me that there was no
>   shortage. In March he was trying to find
>   storage along the Mississippi River. There was
>   no. All tanks full.
>   

Right, never has been a shortage. Just price setting. And the price setters were happy to accommodate the run up until it cut demand, as they were running out of capacity as well.

>   
>   So today we have global demand declining 1
>   million barrels per day.
>   

Right, no big deal. Nothing OPEC hasn’t already adjusted for.

The problem has been the inventory liquidation as prices fell. No telling when that has run it’s course. Futures markets are saying not yet, but getting closer to the end.

The Masters Inventory Liquidation is probably the largest inventory liquidation of all time.

Hopefully it leads to pension funds not being allowed to use passive commodity strategies as investments, but not sure it won’t all come back. There’s still a lot of it going on. I’d vote to have it outlawed.

>   
>   Supply is being cut back. We have the Chinese
>   economy tanking. So are we looking at $25 oil?
>   

Not impossible until the inventory liquidation has run its course. It took about this long in 2006. I didn’t think it would last that long this time, but the liquidation has been a lot larger than back then.

>   
>   If so, we are going to see a violent world at a
>   time of global economic weakness. Russian is
>   struggling, so is Venezuela and Iran. Potential
>   uprisings there.
>   

Yes.

>   
>   Here is the USA it is a true blessing. Without
>   lower oil prices, we would be a serious
>   economic quandary.
>   

It’s already pretty serious! While consumers are being helped, the energy related companies have gotten hurt and helped bring stocks down. Lower crude also makes stronger/USD harder to get overseas, so they stop buying our stuff like they were before. Domestics should pick up that slack as their oil bills go down, but there’s a big lag due to rising unemployment general economic disruption.

>   
>   Who said markets were understandable let
>   alone logical.
>   

Can’t remember. Probably me!


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More Saudi cuts

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The consumption numbers I’ve seen show the US now about flat year over year, but markets have been telling us there’s been an inventory liquidation in progress. The contango in crude has recently come in some, but remains at what is probably ‘full carry’, and last I checked WTI was below Brent.

The gasoline contango has also narrowed, and the RBOB crack is moving out to near zero from trading quite a bit negative for a while.

Saudis to Cut Oil Output Below OPEC Target

Jan 12 (Reuters) &#8212 Top exporter Saudi Arabia plans to cut oil output by up to 300,000 barrels per day below its agreed OPEC target — a proactive step to prop up a collapsing market, industry sources said on Sunday.

OPEC’s most influential member has lowered supply this month to 8 million bpd, meeting its target under OPEC’s pact to reduce overall production by a record amount from Jan. 1.

But strict Saudi discipline has failed to boost oil prices–which at close to $40 are far from the $75 a barrel named by Saudi King Abdullah as a fair price. So Riyadh is prepared, from February, to go beyond what is required by OPEC, the sources said.

“We’ve been told Saudi Arabia will cut to about 7.7 million in February,” said a senior oil executive. “They want to prevent a huge stock build up and a further decline in the oil price.”

The kingdom had increased production unilaterally to about 9.7 million bpd in August last year to calm an oil market that had shot to a record of nearly $150 in July.

But by February, it will have reduced its supply to world markets by a fifth as recession steadily erodes demand for fuel.


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Innocent Frauds (draft in progress)

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The 7 Deadly Innocent Frauds of Economic Policy

Introduction

The term ‘innocent fraud’ was introduced by Professor John Kenneth Galbraith in ‘The Economics of Innocent Fraud’, which was the last book he wrote before he died. He used the term to describe fraudulent concepts that were being sustained by the ‘conventional wisdom’ (a term he created in a previous book). The presumption of innocence by those perpetrating the frauds is characteristic of Professor Galbraith’s cynically gracious approach.

This book reviews 7 ‘innocent frauds’ that I suggest are THE most imbedded obstacles to national prosperity. The first 4 concern the federal government budget deficit, the 5th addresses social security, the 6th international trade, and the 7th savings and investment.

I begin with the innocent frauds of the budget deficit, because they are the most pervasive and most damaging to both the US and the rest of the world’s standard of living.

Click here to read the rest of this post!


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Economists in favor of payroll tax holiday

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Thanks, at least it got a mention.

The bang for the buck thing is pathetic. That has nothing to do with anything.

>   
>   On Sat, Jan 10, 2009 at 9:36 PM, Scott wrote:
>   
>   FYI, the below has only copied in those
>   economists specifically naming a payroll tax
>   holiday. Many of the comments here and in
>   the proposals not included demonstrate an
>   unfortunate lack of understanding of sovereign
>   money. On the other hand, those copied
>   below demonstrate that the payroll tax holiday
>   is supported by at least some economists from
>   just about every political and economic
>   persuasion.
>   

The Ideal Stimulus Package

by Catherine Rampell

Dec 16 (Economix) &#8212 President-elect Barack Obama and members of Congress are considering a fiscal stimulus package that’s reportedly in the ballpark of $500 billion. How should that money be spent?

We asked a group of economists how they would use the money if they had their druthers. For simplicity’s sake, we gave them the condition that they had to use every penny of the $500 billion on government spending or tax cuts or both. A collection of their responses is below.

Tyler Cowen, professor at George Mason University: “I would modernize the few critical bottleneck airports in the U.S., most of all La Guardia and Kennedy. That would not cost a fortune.

“I would try to ensure that state and local governments do not cut funding which they will later restore. To me that is more important, and more conducive to macroeconomic stability, than embarking on new and potentially dubious programs. That will cost most of the money. It’s not that I think state and local governments are always so efficient and wise, but rather this is a very simple and direct way to prevent the economy from being hit by yet another sectoral shock when it is already reeling.

“There are many good ideas, such as electronic medical records, that will not benefit the economy as macroeconomic stimulus. And so they do not make the list as you have phrased the question.

“If there is money left over I would spend it on cutting the Social Security payroll tax for specified groups of lower- to middle-income workers, thus encouraging the resumption of hiring.”

Mark Zandi, chief economist at Moody’s Economy.com:

“The package includes $300 billion in government spending and $200 billion in tax cuts. Government spending provides the largest economic bang for the buck, particularly infrastructure spending, as it immediately adds to output and jobs here in the U.S. Aid to state governments will also forestall immediate cuts in programs and jobs that states have to undertake to satisfy their balanced budget requirements. Infrastructure spending will take time to benefit the economy, and a tax cut is necessary to provide some quick support to the economy. A payroll tax holiday and a permanent payroll tax credit would be effective tax cuts, particularly if designed to help harder-pressed lower- and middle-income households and smaller businesses. If I had my druthers, however, the recovery package would be measurably larger than $500 billion. It is important for policy makers to send a strong and clear signal that they will do whatever is necessary to revive the economy. Only a concerted, comprehensive and consistent policy response stands between a severe recession and another depression.”

Edward L. Glaeser, professor at Harvard University:

  • “(1)…I would certainly put money into scholarships, but you can’t spend 500 billion that way. I haven’t even tried to cost it out. I would — by the way — accompany these things with a certain amount of living assistance that would be conditional on good performance in the program (getting a degree if appropriate).

  • “(2) There must be good transportation and infrastructure projects out there — I would do this probably with states proposing things that are then evaluated by an independent committee to look at cost/benefit analysis. Then make the money contingent on getting highly rated by this group. I presume broadband makes sense.

  • “(3) Aid to states, as a form of revenue-sharing, is O.K. I would also tie this to good performance in other areas…

  • “(4) Ramp up the Earned Income Tax Credit.

  • “(5) Temporarily have the federal government pay the Social Security taxes of poorer Americans. The key is to get money in the hands of people who will spend it — both for that reason and conventional equity grounds — it makes sense to target money towards the poor. They aren’t paying regular taxes (mostly) — the only taxes that can be cut for this group are the S.S.D.I.-type payments — so let’s cut these. Obviously, it needs to be done in such a way that minimizes any distortions not to work.”

Laura Tyson, professor at the University of California, Berkeley, Haas School of Business and chair of the National Economic Council and President’s Council of Economic Advisers under Bill Clinton: “The U.S. economy is caught in three related crises that are reinforcing one another in a downward spiral: a crisis in the housing and mortgage market; a credit crisis; and a crisis of collapsing private demand. These three crises are not self-correcting. They are self-reinforcing. They can be mitigated and reversed only with bold government policies that include: a fiscal economic stimulus package of government spending and tax cuts to fill the gap caused by the shortfall in private demand; policies to stem the mortgage and foreclosure crisis; and policies to stem the credit crisis by recapitalizing the banks and acquiring assets not currently trading among private actors.

“There are three broad goals of fiscal stimulus measures: to reduce the depth and severity of the recession caused by the sharp fall in private demand; to help those most hurt by the recession; and to encourage economic activity that provides a basis for sustainable growth and prosperity in the future.

“Four principles should guide the choice of stimulus measures:

  • “They should be timely in the sense that they increase demand as quickly as possible: examples include federal grants and loans to state and local governments and temporary tax relief.

  • “They should have a significant impact on spending and employment: examples include extended jobless benefits and infrastructure spending on already approved projects.

  • “They should provide relief for those who are most adversely affected by the recession: examples include extended jobless benefits and food stamps and support for state Medicaid programs.

  • “They should focus on growth-enhancing investments in education, infrastructure and alternative/green energy development: examples include: increased support for work-study programs and Pell grants; infrastructure spending on mass transit programs; and enhanced tax credits for the production and utilization of alternative energy.

“The size of the stimulus package depends on how deep and long the recession turns out to be. A 4 percent reduction in G.D.P. indicates a stimulus package of about $600 billion spread out over two years, with the lion’s share spent in the first two quarters of 2009. Based on current economic forecasts, I think a stimulus package of at least this magnitude is warranted. Given the sharp drop in economic activity, I think the dangers of doing too little outweigh the dangers of doing too much.

“For a $500 billion stimulus package, I would include the following policies:

  • $40 billion for additional UI and food stamp benefits
  • $175 billion of infrastructure spending, including about $90 billion for alternative energy and green initiatives
  • $120 billion for grants and loans to state and local governments
  • $165 for household and business tax relief (including a temporary payroll tax holiday)

“I would also support additional government spending of $40-$50 billion for a foreclosure relief/loan modification program. According to scholars at the Center for American Progress, this amount could prevent more than 3 million foreclosures on $640 billion of mortgages and help ease overall credit market conditions. This amount of foreclosure relief could be financed out of the TARP program or included in a larger stimulus package.

“Finally, I would also support a bridge loan for the auto companies in the range of $15-$20 billion. This could also be financed out of the TARP program or included in a larger stimulus package.”


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