Tag Archives: Bernanke

Today’s Data/Bernanke

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Karim writes:

Bernanke gives his latest Congressional testimony and takes Q&A at 10am tomorrow.
He’s unlikely to diverge much from the recent narrative and I expect him to focus more on the changes they made at the last FOMC meeting (easing via extending conditional commitment and new set of forecasts) than highlight more policy changes (QE3 or Twist 2). March/April a more likely time frame for next set of policy changes.

Today’s data backs up the view stated by the Fed in January and recent speeches:

  • House prices continue to fall. Case-Shiller HPI -1.1% in December and -4% y/y.
  • Core durable goods orders -4.5%. Even adjusted for new year effect (expiration of accelerated depreciation in December), still weak, with the 3m annual rate of change now -3.7% vs +1.7%.
  • Conference Board survey rises from 61.5 to 70.8, a 12mth high, with notable improvement in Labor Differential (Jobs Plentiful Less Jobs Hard To Get). But, Plans to Buy a Home in next 6mths drops 0.2, to lowest level since August 2011.

Fits in with the following from their last Statement (where they eased):

While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed.

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Rising Deficits Pose Major Threat to Economy: Bernanke

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Not much progress here:

Rising Deficits Pose Major Threat to Economy: Bernanke

By Jeff Cox

Feb 2 (CNBC) — Rising federal budget deficits are posing a significant threat to the U.S. economy and are likely to cause a crisis if not brought under control, Federal Reserve Chairman Ben Bernanke told Congress Thursday.

Calling the situation “unsustainable,” the central bank leader pointed out that surging health-care costs, along with the high level of government spending used to pull the economy out of recession, are creating fiscal hazard.

“Having a large and increasing level of government debt relative to national income runs the risk of serious economic consequences,” Bernanke told the House Budget Committee. “Over the longer term, the current trajectory of federal debt threatens to crowd out private capital formation and thus reduce productivity growth.”

At the same time, he also warned Congress not to pull the reins too tightly so as to threaten growth.

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News recap comments

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The news flow from last week was so voluminous it was nearly impossible to process. For good measure I want to start today’s commentary with a simple recap of what happened.

On the negative side –

· Greece called a referendum and threw bailout plans up in the air taking Greek 2yrs from 70% to 90% or +2000bps.
· Italian 10yr debt collapsed 40bps with spreads to Germany out 70bps. The moves were far larger in the 2yr sector.
· France 10y debt widened 25bps to Germany. At one point spreads were almost 40 wider.
· Italian PMI and Spanish employment data were miserable.
· German factory orders plunged 4.3 percent on the month.
· The planned EFSF bond for 3bio was pulled.
· Itraxx financials were +34 while subs were +45.
· Draghi predicted a recession for Europe along with disinflation.
· The G20 was flop – there was no agreement on IMF involvement in Europe.
· The US super committee deadline is 17 days away with no clear agreement.
· The 8th largest US bankruptcy in history took place.
· US 10yr and 30yr rallied 28bps, Spoos were -2.5%, the Dax was -6% and EURUSD was -3%.
· German CDS was up 16bps on the week.

On the positive side –

· The Fed showed its hand with tightening dissents now gone and an easing dissent in place.

Too bad what they call ‘easing’ at best has been shown to do nothing.

· The Fed’s significant downside risk language remained intact.

Downside risks sound like bad news to me.

· In the press conference Ben teed up QE3 in MBS space.

Which at best have been shown to do little or nothing for the macro economy.

· US payrolls, claims, vehicle sales and productivity came in better than expected.

And the real output gap if anything widened.

· S&P earnings are coming in at +18% y/y with implied corporate profits at +23 percent q/q a.r.

Reinforces the notion that it’s a good for stocks, bad for people economy.

· Mortgage speeds were much faster than expectations suggesting some easing refi pressures.

And savers holding those securities saw their incomes cut faster than expected.

· The ECB cut 25bps and indicated a dovish forward looking stance.

Which reduced euro interest income for the non govt sectors

· CME Margins were reduced.

Just means volatility was down some.

· There was a massive USDJPY intervention which may be a precursor to a Swiss style Japanese policy easing.

Which, for the US, means reduced costs of imports from Japan, which works against US exports, which should be a good thing for the US as it means for the size govt we have, taxes could be lowered to sustain demand, but becomes a bad thing as our leadership believes the US Federal deficit to be too large and so instead we get higher unemployment.

· The Swiss have indicated they want an even weaker CHF – possibly EURCHF 1.40.

When this makes a list of ‘positives’ you know the positives are pretty sorry

· The Aussies cut rates 25bps

Cutting net interest income for the economy.

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Bernanke comments

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> *DJ Bernanke:US Can Learn From China’s Succesful Economic Growth Story

Right, like how their annual deficit spending has been over 20% of GDP
if you count state lending.

Wonder how he missed that one?

> *DJ Bernanke:Promoting Technology, Education Behind Emerging Nations’ Success
> *DJ Bernanke:Sound Fiscal Policy, Open Trade, Better Rules Behind Emerging Nations’ Success
> *DJ Bernanke:China, India, Other Emerging Nations Can Keep High Growth Rates For Years
> *DJ Bernanke:Over Time, Emerging Economies Like China Will Gradually Slow Down
> *DJ Bernanke:Trade Imbalances Threaten Emerging Nations’ Economic Stability
> *DJ Bernanke:Emerging Nations Will Be Challenged If They Rely On Trade For Growth
> *DJ Bernanke’s Prepared Remarks From Cleveland Clinic Speech

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Bernanke: No Plans to Add New Stimulus Measures Now

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More evidence of the suspected understanding with China- they resumed buying US Tsy secs in return for no more QE:

The U.S. economy “has been doing worse than expected” and Beijing needs to “seriously assess” possible risks to its vast holdings of American debt, said Yu Bin, an economist in the Cabinet’s Development Research Center.

Yu expressed concern about a possible third round of Fed purchases of government bonds, known as “quantitative easing” or QE. He said that might hurt China by depressing the value of the dollar and driving up prices of commodities needed by its industries.

Bernanke: No Plans to Add New Stimulus Measures Now

July 14 (Reuters) — Federal Reserve Chairman Ben Bernanke backed away slightly from promising a third round of stimulus measures, telling a Senate panel Thursday that the central bank “is not prepared at this point to take further action.

The comments during his second day of congressional testimony sent the US dollar higher and caused stock to pare their gains.

On Wednesday, Bernanke suggested to a House panel that the Fed was ready to take further steps to boost the flagging US economy. That sent stocks soaring and pushed the dollar lower.

But on Thursday, Bernanke seemed to back away a bit from that plan.

“The situation is more complex,” he told the Senate Banking Committee. “Inflation is higher…We are uncertain about the near-term developments in the economy. We would live to see if the economy does pick up. We are not prepared at this point to take further action.”

He also said a third round of stimulus may not be that effective.

Bernanke also repeated his warning that a U.S. debt default would be devastating for the U.S. and the global economy.

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Testimony from Chairman Bernanke

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

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Fed Minutes

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The staff still expected that the pace of economic activity through 2011 would be sufficient to reduce the existing margins of economic slack, although the anticipated decline in the unemployment rate was somewhat slower than in the previous projection.


Karim writes:

Staff still forecasting above trend growth, though not as firm as before. Activity indicators coming in as expected, with financial strains in May and June the cause for the revision.

Table below is average of FOMC members, not staff, but appears to have similar profile. Average expectations for 2011 growth at 3.85% from 3.95% prior..

A few participants cited some risk of deflation. Other participants, however, thought that inflation was unlikely to fall appreciably further given the stability of inflation expectations in recent years and very accommodative monetary policy. Over the medium term, participants saw both upside and downside risks to inflation.


Deflation talk still seems contained to a ‘few’ members.

Members noted that in addition to continuing to develop and test instruments to exit from the period of unusually accommodative monetary policy, the Committee would need to consider whether further policy stimulus might become appropriate if the outlook were to worsen appreciably.


This was only mention of QE2 – not very extensive.

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Auerback Critiques Bernanke

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Well stated!!

Bernanke doesn’t understand the basic economics of central banking

By Marshall Auerback

Dec 19 — I would like to incorporate a critique of quantitative easing based on Bernanke’s comments in Ed’s post “Quantitative easing and inflation expectations.”

You’ve got to focus on improving the conditions for potential borrowers, not on the banks’ balance sheets. Banks are never reserve constrained. Even the BIS, the central banks’ central bank, understands this. In a recent report, the BIS said the following:

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.

It is obvious why this is the case. Loans create deposits which can then be drawn upon by the borrower. No reserves are needed at that stage. Then, as the BIS paper says:

in order to avoid extreme volatility in the interest rate, central banks supply reserves as demanded by the system.

The loan desk of commercial banks have no interaction with the reserve operations of the monetary system as part of their daily tasks. They just take applications from credit worthy customers who seek loans and assess them accordingly and then approve or reject the loans. In approving a loan they instantly create a deposit (a zero net financial asset transaction).

The only thing that constrains the bank loan desks from expanding credit is a lack of credit-worthy applicants, which can originate from the supply side if banks adopt pessimistic assessments or the demand side if credit-worthy customers are loathe to seek loans. Banks are never reserve constrained, so this comment below from Bernanke is either ignorant or deliberately misrepresents the actual operations of the banking system (as opposed to the nonsensical Economics 101 version).

Ultimately, if the economy normalized, and the Fed took no action, the banks would take those reserves, try to lend them out, and they would begin to circulate, and the money supply would start to grow. And then, ultimately, that would create an inflationary risk. So, therefore, as the economy begins to recover, and as we move away from this very weak economic environment, the Federal Reserve is going to have to pull those reserves out of the system.

The mainstream belief is that quantitative easing will stimulate the economy sufficiently to put a brake on the downward spiral of lost production and the increasing unemployment. Quantitative easing merely involves the central bank buying bonds (or other bank assets) in exchange for deposits made by the central bank in the commercial banking system – that is, crediting their reserve accounts. It is commonly claimed that it involves “printing money” to ease a “cash-starved” system, and based on the erroneous belief that the banks need reserves before they can lend and that quantitative easing provides those reserves. That is a major misrepresentation of the way the banking system actually operates.

Bank lending is not “reserve constrained.” Banks lend to any credit worthy customer they can find and then worry about their reserve positions afterward. Even the BIS recognizes this. In reality, if the banks are short of reserves then they borrow from each other in the interbank market or, ultimately, they will borrow from the central bank through the so-called discount window. They are reluctant to use the latter facility because it carries a penalty (higher interest cost). But the reason that the commercial banks are currently not lending much is because they are not convinced there are credit worthy customers on their doorstep.

The current incoherence of our economic policy making could diminish if we had a Fed chairman who understood how the banking system genuinely operated, as well as one who would understanding the linkages between banking lending and fiscal policy, which he persistently downplays (or even worse when he starts calling for long term reforms to balance the Federal government’s budget). It is a national tragedy that this man is being given the chance at another term in office.


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Chinese economist sounds off on US monetary policy

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Right, this is the nonsense that’s been moving the speculators and portfolio managers, but not the underlying fundamentals.

If an asset inflation does materialize it will be for an entirely different reason.

>   
>   (email exchange)
>   
>   On Wed, Dec 9, 2009 at 2:03 PM, wrote:
>   

Yesterday, U.S. Fed Chief Ben Bernanke declared the U.S. economy is facing “formidable headwinds” and effectively vowed to continue printing paper dollars like there’s no tomorrow.

The reaction from China came quickly, as Andy Xie, recently named by BusinessWeek as one of China’s most influential economists, pulled no punches.

Xie accused the Fed chief of “poisoning” the U.S. economy by keeping interest rates near zero and creating a tidal wave of newly printed paper dollars. He warned that the next global crisis will be driven by asset inflation.


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Valance Weekly Economic Chart Book

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Valance Weekly Economic Chart Book

A bit disorganized, but these are my impressions as of month end.
(Look for the usual couple of days or so of month end allocations driving the technicals.)

I don’t see much to get encouraged about on almost all of these charts.

In general, demand was trending lower since maybe mid 2006, took a sharp dip in mid 2008 with the great Mike Masters Inventory Liquidation that ended in late Dec 2008, after which the rate of decline stopped accelerating (second derivative change), and now were are, for the most part, back on the ‘trend line’ of the slow decline in demand that started in mid 2006.

Personal income looks very weak, hurt by falling interest income as previously discussed. The clunker lift has reversed, and housing remains very week with no real signs of recovery yet. (about 2% of GDP was clunkers and inventories)

The deficit got large enough due to the automatic stabilizers around year end, market functioning returned as the Fed eventually accepted enough different kinds of collateral from its banks to adequately fund them. (should have been lending unsecured to its member banks all along, etc.)

But while the Obama fiscal package added some demand, and GDP stabilized, the zero interest rate policy continued to shift savings incomes to widening bank net interest margins, and the Fed’s $2 T portfolio began draining another maybe 60 billion a year in private sector interest income. Additionally, interest rates on tsy secs have declined sharply with the Fed rate cuts. (While I fully support a zero rate policy I also recognize the need to sustain demand with a payroll tax holiday, per capita revenue sharing, and an $8/hr fed funded job for anyone willing and able to work.)

And now with productivity higher than real GDP growth, employment continues to fall, though at a lower rate, and capacity utilization in general remains at very low levels. Prices remain very weak, apart from gold, which could be a bubble driven by the misconception that the Fed’s ‘quantitative easing’ policy is inflationary. In fact, it’s nothing but an asset shift that modestly reduces term interest rates at the cost of draining billions in interest income from the private sector.

If gold does turn out to have been a bubble and collapse, it could be highly demoralizing as it would reveal the Fed does not have the tools to ‘reflate’ at will. Dollar shorts could start covering, further taking away the bid from stocks (also as previously discussed). And if the Saudis have left the prices to their refiners below current levels, crude and products will fall as well.

All major foreign govts. seem to be continuing to favor export led growth, which will also keep US domestic demand in check.

And, in general, it looks like most of the world is looking to tighten up fiscal policy, believing in the like of the ‘debt trap’ and also that monetary policy is expansionary and inflationary.


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