Mish's Global Economic Trend Analysis |
Chris Whalen: Geithner Cries Wolf, "No Downside" to Not Raising the Debt Ceiling; How You Can Help Posted: 09 Jun 2011 12:57 PM PDT Chris Whalen says "No Downside" to Not Raising the Debt Ceiling Geithner Cries WolfWhat If the U.S. Treasury Defaults? The WSJ article referenced above is What If the U.S. Treasury Defaults? One of the world's most successful money managers, the lanky, sandy-haired Mr. Druckenmiller is so concerned about the government's ability to pay for its future obligations that he's willing to accept a temporary delay in the interest payments he's owed on his U.S. Treasury bonds—if the result is a Washington deal to restrain runaway entitlement costs.The Upside and Downside To suggest there is "No Downside" is a bit inaccurate. A better way of phrasing the setup is there is "no NET downside" to not increasing the ceiling without significant budget cuts. The downside is a temporary default. Interest rates may go up if that happens. Some parties maybe harmed in the process. Thus, the downside is a temporary delay in payments and the small mess that might entail. The upside is a potential permanent reduction in US spending. From my perspective, that is a massive upside potential, for a bit of short-term downside. Risk of Greek-Style "Solution" It should be crystal clear that Congress and the administration need to do something about budget deficits before the market imposes a "Greek-Style" solution on the US. I mentioned that possibility in my recent Yahoo Finance video appearance: Debt Ceiling Discussion on Daily Ticker with Mish, Aaron Task, Henry Blodget: Will the Bond Market Eventually Force Congressional Hands? How You Can Help Please pick up the phone, call your Congressional representatives, and insist on "Major" budget reductions now "Not in the Future", before agreeing to hike the debt ceiling. Here is the Online Directory for the 112th Congress It is time Congress call Geithner's and the President's bluff. The way to make that happen is to insist your representatives recognize something must be done NOW, not 10-years from now about the budget crisis. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List |
Confused Trichet Walks Tightrope on Liquidity, Rate Hikes, Greece; Reflections on Unexpected Things Posted: 09 Jun 2011 10:14 AM PDT The US dollar is a bit firmer vs. the Euro in the wake of a Trichet's comments regarding "strong vigilance", code words for a "hike is coming" at the next meeting. Trichet also got into a pissing match with German finance minister Wolfgang Schaeuble who said bondholders must contribute a substantial share of a second aid package for Greece. Schaeuble proposed a 7-year maturity extension that credit-rating companies say would constitute a default. The rest of Trichet's prepared words were certainly more dovish than hawkish, with a pledge to provide "unlimited liquidity". Please consider ECB's Trichet flags July rate rise, hardline on Greece "On balance risks to the outlook for price stability are on the upside, accordingly strong vigilance is warranted. On the basis of our assessment we will act in a firm and timely manner," Trichet told a news conference after the ECB kept its main refinancing rate at 1.25 percent.Commodity Excuse is Lame Central banks hike when they want to, or when the market forces them to, using whatever excuse they want at the moment. The excuse now is rising commodity prices. The fact of the matter is commodity prices are rising primarily because of a torrent of unsustainable infrastructure malinvestment in China in conjunction with peak oil. One can also blame policies at the Fed, especially QE2. As such, and from the perspective of Europe, there is little inflationary about it. Trichet Clearly Confused Perhaps a rate hike is warranted, perhaps not, but Trichet's confused comments don't help. Moreover, if inflation is a problem, why should a central bank pledge "unlimited liquidity"? Are we to believe a hike from 1.25 to 1.5 percent will cure the inflation problem, so much so that the ECB can continue offering "unlimited liquidity"? Walking Multiple Tightropes Trichet is walking multiple tightropes simultaneously, partly out of his own foolish stubbornness and partly because of flaws in the structure of the Euro-Zone policy itself. Thus, it's no wonder he sounds confused. He has only himself to blame for the ECB's balance sheet being loaded to the gills with garbage from Greece and Ireland. Much of the rest of his problem has to do structural problems in Maastrict Treaty that created the European Union. Given that he was one of the architects of that treaty he can blame himself for that as well. Regardless, interest rate policy of "One Size Fits Germany" is not tenable in practice. Recognition of that predicament is what led Trichet to propose major changes in the treaty. For a discussion of what Trichet now wants, please see Trichet Calls for Creation of European "Nanny-State" and Fiscal "Nanny-Zone" . Is Another Hike Suitable Even For Germany? For now, Trichet has signaled his intention to get in another hike. I am wondering "Is a hike even the right policy for Germany?" In case you think it is obvious, please consider German Industrial Output Unexpectedly Fell in April on Construction Slide Jun 8, 2011Reflections on Unexpected Things Consensus is this is a "moderation" in growth not a halt of it. Perhaps. However, it might also help to know that Industrial production "unexpectedly" dropped .9% in France, and consumer spending "unexpectedly" plunged in Italy. Of course job growth "unexpectedly" plunged in the US and the unemployment rate "unexpectedly" rose. Also in the US, there was an "unexpected" plunge in the ISM, in new orders and order backlogs. Please see Mish on Yahoo Finance Daily Ticker on Slowing Global Economy; U.S. Manufacturing ISM Plunge; Order Backlog and New Orders Barely Above Contraction for details. The number of consecutive "unexpected" things that has surprised economists is rather amusing. Once again I suggest that economists are an amazingly optimistic lot smack in the face of a global economy that is clearly slowing. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Click Here To Scroll Thru My Recent Post List |
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