Central Perk

luni, 8 august 2011

Watch Live at 1 p.m. EDT: President Obama delivers a statement

Your Daily Snapshot for
Monday, August 8, 2011

Watch Live at 1 p.m. EDT: President Obama delivers a statement

This afternoon at 1 p.m. EDT, the President will deliver a statement to the press in the State Dining Room. You can watch live at WhiteHouse.gov/Live.

Photo of the Day

President Barack Obama walks across the South Lawn of the White House before departing for Camp David, Aug. 5, 2011. (Official White House Photo by Lawrence Jackson)

In Case You Missed It

Here are some of the top stories from the White House blog.

President Obama Directs New Atrocity Prevention Measures
A new tool to strengthen our ability to prevent genocide and other crimes against humanity

Startup Stories: A Race for Better Healing Therapies
How President Obama's capital gains tax cut is helping entrepreneurs develop a promising new medical treatment

Meeting the President’s Challenge: Businesses Supporting our Veterans
The public and private sector reacts very positively to President Obama's new proposals on finding jobs for our military veterans

Today's Schedule

All times are Eastern Daylight Time (EDT).

10:00 AM: The President receives the Presidential daily Briefing

1:00 PM: The President delivers a statement to the press

1:45 PM: Press Briefing by Press Secretary Jay Carney

6:40 PM: The President delivers remarks at a DNC event

7:40 PM: The President delivers remarks at a DNC event

Indicates events that will be live streamed on WhiteHouse.gov/Live

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Seth's Blog : Selling the benefits of charity

Selling the benefits of charity

Everything we do, we do because somehow it benefits us.

We go to work for the satisfaction (I hope) and because we get paid. We smile at a stranger because it feels good to be nice (and perhaps we'll get a smile in return). We pick up litter when no one is looking because telling ourselves a story about being a good person is worth the effort.

Some people have figured out that charity is an incredible bargain. For the time and money it costs, the benefits exceed what could be attained in almost any other way. A bargain compared to chocolate, or an amusement park visit or buying a shiny new car you probably don't need.

For some, the benefit is in the way society respects the donor. Hence buildings named after Andrew Carnegie or Bill Gates. For many, though, hidden charity is worth far more, because the incentives are purer. A donation earns you peace of mind.

I'm fascinated by people who see no benefit in donating to charity, who, in fact, see a negative. My hunch is that for these people, the worldview is: if charity is important, I better give more. If that's true, the thinking goes, then whatever I give isn't going to make me feel good, it's going to make me feel worse... for not giving enough. Easier to just avoid the issue altogether.

I think marketers of causes that do good have a long way to go in selling the public on the core reason to give... don't give because you get a tote bag, or a prize at the charity auction or even a plaque. The scalable unique selling proposition is that being part of the community is worth more than it costs.

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duminică, 7 august 2011

Mish's Global Economic Trend Analysis

Do These Idiots Realize How Stupid They Sound?
ECB Seeks to Avert What Has Already Happened; Raspberries and Gold
S&P Futures Open Down 30 Points, -2.6%; ECB to "Actively Implement" Bond Purchases
France AAA Rating on the Line; S&P Says 1 in 3 Chance of Further US Downgrades; Contagion in Downgrades? Currency Crisis Escalates; Euro Endgame
Israel, Dubai, Saudi Arabia Shares Plunge in Wake of S&P Downgrade; Israel Drops 7%, Dubai 3.7%, Saudi 5.5%; Is S&P Downgrade to Blame?
Decade of Stimulus Yields Nothing But Mountain of Debt; What to Do About It?

Do These Idiots Realize How Stupid They Sound?

Posted: 07 Aug 2011 08:36 PM PDT

Just how idiotic is it to seek to prevent what has already occurred? I suggest that is blatantly idiotic. Here is a case in point.

Earlier this evening, I noted ECB Seeks to Avert What Has Already Happened

I cannot help but laugh out loud at some of the headlines this evening. By any rational measure, confidence has collapsed, yet G-7 Seeks to Avert Collapse in Confidence

That the ECB needs to take these actions is a 100% sure-fire sign that investors have lost confidence.

That is ridiculous enough, but the height of absurdity is found in the G-7 Statement on Renewed Strains

We reaffirmed our shared interest in a strong and stable international financial system, and our support for market-determined exchange rates.

Today the G-7 advocated both currency and and bond-market interventions "whatever it takes" yet sings the praises of "market-determined exchange rates".

I really do have to ask "Do These Idiots Realize How Stupid They Sound?"

Definition of Idiot

The above question is more complicated than it seems at first glance. In typical usage, "idiots" by definition do not realize what they are saying.

However, let's throw out a definition as follows: Idiot - Someone devoid of common sense who lives in the shelter of academia or politics, with no real-world experience. Also included in this definition is someone with real-world experiences yet ignores the real world in favor of academics, politics, or desires.

Bernanke with a PhD, and Krugman with a Noble Prize both qualify as potential idiots under the above definition. Bear in mind that sometimes (when it suits their goals) both may say things that make perfect sense. I agree with Krugman about 20% of the time. Such is the problem with this definition of idiocy.

Common Sense vs. Purposeful Idiocy

On grounds of common sense, anyone simultaneously praising free markets and intervention on the exact same issue is an idiot.

But Wait! What if the statement was a lie on purpose, hoping that idiots in mainstream media would not catch the lie?

Recall that Jean-Claude Juncker, Luxembourg PM and Head Euro-Zone Finance Minister says "When it becomes serious, you have to lie"

Is the support for free markets just another purposeful lie?

One cannot easily determine the truth in these instances. However, in accordance with Occam's Razor, the simplest explanation is likely the best.

One case suggests that potential idiots are telling lies on purpose. The simple case suggests that idiots can be expected to behave like idiots.

Thus, I come to the conclusion that "These Idiots Do Not Realize How Stupid They Sound".

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

ECB Seeks to Avert What Has Already Happened; Raspberries and Gold

Posted: 07 Aug 2011 06:13 PM PDT

I cannot help but laugh out loud at some of the headlines this evening. By any rational measure, confidence has collapsed, yet G-7 Seeks to Avert Collapse in Confidence

Group of Seven nations sought to head off a collapse in global investor confidence after the U.S. sovereign-rating downgrade and a sell-off in Italian and Spanish debt intensified threats to the world economic recovery.

The G-7 will take "all necessary measures to support financial stability and growth," the nation's finance ministers and central bankers said in a statement today. Members agreed to inject liquidity and act against disorderly currency moves if necessary.

The European Central Bank indicated separately that it will buy Italian and Spanish bonds and Japan signaled further dollar purchases in a sign of concern that prices are becoming unhooked from fundamentals. Stocks extended last week's decline, the biggest since 2008, adding to risks for a global rebound already burdened by European fiscal cuts and elevated U.S. unemployment.

That the ECB needs to take these actions is a 100% sure-fire sign that investors have lost confidence.

Raspberries and Gold

"The G-7 just gave a raspberry to S&P and basically said its analysis is irrelevant," said Diane Swonk, chief economist at Mesirow Financial Inc. in Chicago.

I can top that. The futures so far have given the raspberry to the ECB and the G-7. Moreover, gold has given the raspberry to nearly everything else. Grain, energy, and equity futures are all trading lower. However Gold is up $34 to $1684 and silver is up $1.18 to $39.39.

Addendum:

The feed on Zero Hedge has been messed up all evening. It has been both duplicated and not working. I am not sure if this is universal or not. However, links are now working (at least for me) but some of them may still be duplicated.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

S&P Futures Open Down 30 Points, -2.6%; ECB to "Actively Implement" Bond Purchases

Posted: 07 Aug 2011 03:02 PM PDT

What started out as an extremely poor idea has now turned into a bet the bank bond-buying strategy as ECB Signals Purchases of Italian, Spanish Bonds.

The European Central Bank said it will "actively implement" its bond-purchase program, signaling it is ready to start buying Italian and Spanish securities to counter the sovereign debt crisis.

In a statement issued in the name of President Jean-Claude Trichet after an emergency teleconference meeting of policy makers, the Frankfurt-based ECB welcomed Italy and Spain's efforts to reduce their budget deficits. It also called on all euro-area governments to follow through on the measures agreed at a July 21 summit, including allowing the European Financial Stability Facility to purchase bonds on the secondary market.

"It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Program," the central bank said. "This program has been designed to help restoring a better transmission of our monetary policy decisions -- taking account of dysfunctional market segments -- and therefore to ensure price stability in the euro area."

Buying Italian and Spanish debt may open the ECB to accusations it is bailing out profligate nations, breaching a key principle in the euro zone's founding treaty and eroding its credibility. Germany's Bundesbank opposes the move.

"The ECB is once again intervening as the last line of defense," said Jacques Cailloux, chief European economist at Royal Bank of Scotland in London. "The intervention will put a halt to the bond market crash that some member states faced. However, the ECB is now in for the long haul and will potentially have to buy up to half of the Italian and Spanish traded debt, the biggest risk-pulling effort ever engineered in Europe."

The initial reaction from the market was swift and severe. S&P futures opened up 30 points in the red, Nasdaq futures 47 points in the red.

The night is still young and the intervention in Italian bonds begins tomorrow.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

France AAA Rating on the Line; S&P Says 1 in 3 Chance of Further US Downgrades; Contagion in Downgrades? Currency Crisis Escalates; Euro Endgame

Posted: 07 Aug 2011 11:58 AM PDT

With the US AAA rating gone, how long can France hold its AAA rating? I suspect not long. So where will that leave the ECB attempting to put a circle around Italy? Will Germany have to backstop all of Europe?

Those are the new key questions and notice how the key question list keeps growing larger in size and significance.

France Vulnerable to Rating Cuts

Bloomberg reports AAA France May Be Vulnerable After U.S. Cut

The decision by Standard & Poor's to downgrade the U.S. credit rating leaves France as the AAA country most likely to lose its top grade, some investors and economists say.

France is more expensive to insure against default than lower-rated governments including Malaysia, Thailand, Japan, Mexico, Czech Republic, the State of Texas and the U.S.

"France is not, in my view, a AAA country," said Paul Donovan, London-based deputy head of global economics at UBS AG. "France can't print its own money, a critical distinction from the U.S. It is not treated as AAA by the markets."

"If Italy and Spain have difficulties, are we sure that, for instance, France can still be considered a 'core' country?" said Marco Valli, chief euro-area economist at UniCredit Global 'Core' is becoming a narrower group of countries."

While France's debt of 84.7 percent of gross domestic product is less than Italy's 120.3 percent, as a percentage of economic output it has risen twice as fast as Italy's since 2007. French government debt totaled 1.59 trillion euros ($2.3 trillion) at the end of 2010, according to the European Union; Italy's was about 1.8 trillion euros. France has had a larger budget deficit than Italy every year since 2006. S&P rates Italy A+, four levels below France.

"If French authorities do not follow through with their reform of the pension system, make additional changes to the social-security system and consolidate the current budgetary position in the face of rising spending pressure on health care and pensions, Standard & Poor's will unlikely maintain its AAA rating," S&P said in a June 10 report.

The S&P warned the US, now it has warned France. Notice how the rating agencies want austerity. I asked some tough questions above, here is a cream-puff question: Short-term, what will all these austerity measures do to global growth?

Japan Threatens More Yen Intervention

Adding to the global tension, Japan Official Warns of More Yen Selling

A Japanese Finance Ministry official said the government is ready to sell yen again following last week's move if it sees speculative trades driving the currency higher.

Further intervention would "maintain the effect and warn those who make unusual moves" in the currency market, Vice Finance Minister Fumihiko Igarashi said on a television program of public broadcaster NHK yesterday.

Japan acted alone in selling the yen last week, in contrast with a previous intervention in March that was coordinated among the G-7. The Bank of Japan added 10 trillion yen of monetary stimulus on Aug. 4, hours after the Finance Ministry's move.

Baba and Lee at Goldman Sachs said that Japan has been buying U.S. Treasuries when it sells yen, leaving it with more than 30 trillion yen in unrealized losses that will test the government's "true determination" to combat the currency's rise.

Japan maintains its trust in the ability of the U.S. to pay its debts and expects Treasuries to remain an attractive investment, a government official from the Asian nation said yesterday on condition of anonymity. Japan is the second-largest international investor in Treasuries, behind China.

Countries do not care much about losses on treasury holdings. They care about exports. Notice how even amidst the S&P downgrade of US debt Japan's reaction is to buy more.

I covered this topic at length on Friday in Reserve Currency Curse: Idea China to Stop Buying Treasuries After S&P Downgrade is Fallacious; US Would Welcome China Not Buying US Treasuries!.

Global Currency Wars

In spite of its stated "strong dollar" policy, clearly the US wants a lower dollar. It is equally clear (and stated) that Japan wants a lower Yen, Brazil wants a lower Real, Switzerland wants a lower Swiss Franc, and China does not want the Yuan to rise.

Yet every month, someone talks about China or Japan or some other country dumping treasuries or dumping the dollar.

In case you missed it, please consider Global Currency Wars Enter New Stage; Brazil Calls Off Truce, South Korea Reviews "All Possibilities", Philippines Threatens "Prudential Limits".

When does this madness blow sky high in a global currency crisis? I will tell you it is going to happen, I just cannot tell you when.

Europe's Structural Problems

Structurally the only way to resolve the European mess is

Adoption of a European nanny state complete with common bonds and common fiscal policies
Partial breakup of the Eurozone

Euro Endgame

Would Germany go along with the former? How difficult is the latter?

I cannot answer the former but the latter is easier said than done. Greece for example would immediately blow up in hyperinflation if it was forced to immediately go back on the Drachma. No one would want that. Capital and human capital would both flee Greece. The same might apply to Portugal and Spain.

Germany could leave. Otherwise, slowly but surely the European Nanny State solution will be forced down the throats of screaming German taxpayers.

The endgame is not clear, and both option 1 and 2 involve huge unresolved issues with global consequences. What is clear is the current path is unsustainable. There has never been a successful currency union in history that did not also involve a fiscal union as well. This time will not be different.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Israel, Dubai, Saudi Arabia Shares Plunge in Wake of S&P Downgrade; Israel Drops 7%, Dubai 3.7%, Saudi 5.5%; Is S&P Downgrade to Blame?

Posted: 07 Aug 2011 10:25 AM PDT

The Mideast markets typically run Sunday to Thursday. However, the Saudi Arabia market is open on Saturday. The global selloff hit Saudi on Saturday and spread to Israel and Dubai on Sunday.

Israel Drops 7 Percent, 19.9% Since April 21

Israeli Stock Index Tumbles Most Since 2008

Israel's benchmark stock index plunged the most in almost 11 years after Standard & Poor's lowered the U.S. credit rating and amid concern the widening sovereign debt crisis in Europe will stall global growth.

Israel Discount Bank Ltd. (DSCT), the country's third-largest lender, skidded 10 percent. Nice Systems Ltd. (NICE) slumped the most since November 2008. All 25 shares in the TA-25 Index tumbled, pushing the gauge down 7 percent, the biggest decline since October 2000, to 1,074.27 at the 4:30 p.m. close in Tel Aviv. The index is near the so-called bear-market territory after retreating 19.9 percent from a record high of 1,341.89 on April 21.

Dubai Shares Drop 3.7 Percent

Dubai Shares Drop Most Since February

Emaar Properties PJSC (EMAAR), developer of the world's tallest tower, slumped 5.3 percent. Arabtec Holding Co. (ARTC) dropped the most since March after it said second-quarter profit fell 74 percent. The DFM General Index (DFMGI) lost 3.7 percent, the most since Feb. 28, to 1,484.31 at the 2 p.m. close in Dubai. The measure has plunged 12 percent from this year's high in April, entering a so-called correction.

Saudi Shares Plunge 5.5%

Saudi Shares Plunge as U.S. Downgrade Fuels Concern Over Global Economy

Saudi Arabian shares tumbled for a third day, sending the benchmark index to its largest intraday drop since March, amid rising concerns about the global economy after Standard & Poor's cut the U.S.'s credit rating for the first time.

Saudi Basic Industries Corp. (SABIC), or Sabic, the world's biggest petrochemicals maker, fell the most in five months. Al Rajhi Bank (RJHI), the kingdom's largest publicly traded lender by market value, reached its lowest price since March.

The 147-company Tadawul All Share Index (SASEIDX) slumped 5.5 percent to 6,073.44, the steepest decline since March 1, at the 3:30 p.m. close in Riyadh. All 15 industry groups fell. The gauge has fallen 10.5 percent from the year-high of 6,788.42 on Jan. 16.

"The Saudi market is reacting to the steep declines in global markets over the weekend," said Asim Bukhtiar, an equity analyst at Riyad Capital. "Growing concerns of the U.S. relapsing into recession are driving sentiment."

S&P Downgrade Did Not Cause This

Analysts worded all these reports as if the S&P downgrade was to blame or partially to blame. The facts of the matter are these.

The global economy is slowing
European debt crisis has escalated
A global currency war is underway
The US is headed for recession if not in recession now
Europe is already in a recession in my estimation

The downgrade itself is not the problem. Rather the S&P downgrade (long overdue) is one of many symptom of a much larger global financial crisis. Nonetheless, expect many demagogues to make S&P the scapegoat if the decline escalates this week.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Decade of Stimulus Yields Nothing But Mountain of Debt; What to Do About It?

Posted: 07 Aug 2011 12:13 AM PDT

Is there any kind of stimulus the US did not try in the last 10 years?

We had 1% interest rates from Greenspan fueling housing.
We had wars from Bush and Obama fueling defense industry employment.
We had two rounds of Quantitative easing from the Fed.
We had cash-for-clunkers.
We had two housing tax credit packages.
We had an $800 billion stimulus package from Congress for "shovel-ready" projects.
We had stimulus kickbacks to states.
We had HAMP (Home Affordable Mortgage Program).
We had bank bailouts out the wazoo to stimulate lending.
We had Small Business lending programs.
We had central bank liquidity swaps.
We had Maiden Lane, Maiden Lane II, and Maiden Lane III
We had Single Tranche Repurchase agreements
We had the Citi Asset Guarantee
We had TALF, TARP, TAF, CPFF, TSLF, MMIFF, TLGP, AMLF, PPIP, and PDCF
We had so many programs the Fed must have run out of letters because they were not given an acronym.

That is a partial list. Other than bailing out bondholders what exactly do we have to show for any of it? The one-word answer is "debt".

Decade of Stimulus Yields Nothing But Debt

Caroline Baum wrote an excellent article on this theme. It was so good I asked if I could reproduce it in entirety.

With permission please consider Decade of Stimulus Yields Nothing but Debt: Caroline Baum

When George W. Bush took up residence in the White House in January 2001, total U.S. debt stood at $5.95 trillion. Last week it was $14.3 trillion, with $2.4 trillion freshly authorized by Congress Tuesday.

Ten years and $8.35 trillion later, what do we have to show for this decade of deficit spending? A glut of unoccupied homes, unemployment exceeding 9 percent, a stalled economy and a huge mountain of debt. Real gross domestic product growth averaged 1.6 percent from the first quarter of 2001 through the second quarter of 2011.

It doesn't sound like a very good trade-off. And now Keynesians are whining about discretionary spending cuts of $21 billion next year? That's one-half of one percent. And it qualifies as a "cut" only in the fanciful world of government accounting.

The Budget Control Act of 2011 will save $917 billion over 10 years relative to the Congressional Budget Office's baseline. It leaves the tough work to a bipartisan congressional committee of 12, to be appointed by the leadership in each house. If this supercommittee fails to agree on a minimum of $1.2 trillion of additional savings over 10 years, automatic spending cuts -- evenly divided between defense and nondefense -- will kick in.

Is there any reason to think the same folks who couldn't agree on a grand bargain this past month will join hands and find commonality in the next three, with one month off for vacation?

Rosy Scenario

Even if the committee agrees on the prescribed savings by Nov. 23 and Congress enacts them by Dec. 23, as required, laws passed today aren't binding on future congresses.

Throw in the fact that revenue and budget forecasts tend to be overly optimistic, and there's even less reason to think Congress has put the U.S. on a sound fiscal path.

In a July 2011 working paper for the National Bureau of Economic Research, Harvard economist Jeffrey Frankel identified a pattern of over-optimism in official forecasts, a bias that gets bigger in outer years. (Who can forget the CBO's 2001 estimate of a 10-year, $5.7 trillion budget surplus?) A fixed budget rule, such as the euro area's Stability and Growth Pact with its mandated deficit-to-GDP ratios, only exacerbates the tendency.

"Political leaders meet their target by adjusting their forecasts rather than by adjusting their policies," Frankel writes.

First Installment

The deal hashed out in Washington at the eleventh hour this week does nothing to curb the unsustainable growth of entitlement spending -- on programs such as Medicare, Medicaid and Social Security. Medicare outlays have risen 9 percent a year for the last 30 years in a period of stable demographics, according to Steven Wieting, U.S. economist at Citigroup Inc. The automatic spending cuts outlined in the budget act would limit reductions in Medicare expenditures to no more than 2 percent a year.

By the end of 2012 or start of 2013, the federal government will be back at the trough with a request for additional borrowing authority. The debt will keep rising, and the ratio of publicly held debt to GDP will increase from 62 percent last year to as much as 90 percent in 2021, according to some private estimates, depending on what Congress does about the expiring tax cuts, the Medicare "doc fix" and the alternative minimum tax.

The CBO's estimate of $2.1 trillion in savings over 10 years is well short of the $4 trillion Standard & Poor's says is necessary to stabilize the debt and avoid a rating downgrade.

'Architectural Change'

No matter. Some prominent Keynesians are advocating more spending now for an economy that is sputtering. Alas, there is little appetite in this country, and less in Congress, for more spending in light of the questionable results. A lost decade doesn't seem like a good return on an $8.35 trillion investment. (For purists, only $6 trillion of the increase was in marketable debt, the kind of good old deficit spending Keynesians love.)

Maybe it's time to try something new and different. In 2002 I wrote a column titled, "How About Some Tax Reform Along With Tax Relief?"

How about it? Get rid of the loopholes. Better yet, scrap the entire tax code, which would decimate the lobbying industry. Implement a flat tax or a national sales tax. The time has come for what former Treasury Secretary Paul O'Neill calls "architectural change."

Can the Code

The current tax code is burdensome, inefficient and costly to administer. O'Neill says it costs the Treasury an estimated $800 billion annually, divided equally between administrative costs and uncollected revenue.

Eliminate the corporate and individual income tax, he says, and replace them with a value-added or consumption tax, with tax refundability for lower-income households.

"We should focus the tax system on raising revenue for the things we as a society need," O'Neill says.

Of course, what society needs is a matter of opinion. Without strong economic growth, the options are more limited, the choices more difficult. Fiscal stimulus can have only a short-term impact. The government taxes or borrows from Peter to pay Paul, reflecting a temporary transfer of resources, nothing more.

What does the nation have to show for chronic short-term thinking and policies like these? Long-term problems and a mountain of debt.

Keynesians Always Want More Stimulus

Baum wrote "Some prominent Keynesians are advocating more spending now for an economy that is sputtering."

She is too polite, but to follow suit I will not name-drop either.

Keynesians always want more stimulus. They claim they don't, but there is never a time any of them ever wanted to run surpluses or even a balanced budget out of fear of ending a nascent recovery or starting a "recession of choice" as one Keynesian clown put it.

More to the point, the idea that government or the Fed can micro-manage the economy stepping in as needed is absurd. Heck the Fed could not even see a housing bubble or a recession and it is supposed to manage the economy?

Look at the supporters of Fannie Mae in Congress. Look at Democrats whining about cutbacks in social programs 100% of the time. They are supposed to run a surplus?

Lesson of Japan

For over 20 years Japan tried Monetarist (various QE and interest rate) stimulus as well as Keynesian (fiscal) stimulus and all it has to show for it is the highest debt-to-GDP ratio of any major country in the word. Rest assured that is going to matter sometime within the next 5 years.

Right now we are following their path and it clearly is not working.

How About We Try Something Different?

I am with Caroline here, how about trying something different like scrapping the tax code?

I will add my standard three ideas 100% guaranteed to help cities and states.

Scrap Davis and all prevailing wage laws
Eliminate collective bargaining of public unions
Institute national right-to-work laws

If you want to try something really radical (yet perfectly sensible), here is an idea that is also guaranteed to help: get rid of the Fed and its perpetual bubble-blowing, moral-hazard, bail-out-the-bondholder policies.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Seth's Blog : Bypassing the leap

Bypassing the leap

Every now and then, a creative act comes out of nowhere, a giant leap, a new way of thinking apparently woven out of a brand new material.

Most of the the time, though, creativity is the act of reassembling many elements that are already known. That's why domain knowledge is so critical.

The screenwriter who understands how to take the build that went into the classic Greg Morris episode of the Dick Van Dyke show and integrate it with the Maurce Chevalier riff from the Marx Bros... Or the way Moby took his encyclopedic knowledge of music and turned into a record that sold millions... if you don't have awareness and an analytical understanding of what worked before, you can't build on it.

That's one of the reasons that the recent incarnation of the Palm failed. The fact that the president of the company had never used an iPhone left them only one out: to make a magical leap.

It's not enough to be aware of the domain you're working in, you need to understand it. Noticing things and being curious about how they work is the single most common trait I see in creative people. Once you can break the components down, you can put them back together into something brand new.

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sâmbătă, 6 august 2011

Mish's Global Economic Trend Analysis

Euro-Area Central Banks to Hold Crisis Call; G-7 Officials to Discuss Coordinated Action; Ratings of UK, France in Jeopardy; Meeting Agenda

Posted: 06 Aug 2011 12:55 PM PDT

In "secret" meetings (that everyone knows about) Euro-Area Central Banks to Hold Crisis Call

Euro-region central bank governors will hold emergency talks tomorrow aimed at stopping Spain and Italy from becoming the next victims of the sovereign debt crisis and limiting the market fallout from the first U.S. rating downgrade in history.

The central bank heads will hold a conference call at 6 p.m. Paris time, said a euro-area central bank official who declined to be identified because the talks are confidential. An spokesman for the European Central Bank declined to comment.

Coordinated Action

The Trend Letter reports AP source: G-7 finance officials to discuss co-ordinated central bank action

Financial officials from the Group of Seven industrialized nations will discuss how to co-ordinate action among their countries' central banks, a person familiar with the matter said Saturday, following several days of market panic and a downgrade of the U.S. credit rating.

The person spoke on condition of anonymity because the level and timing of the contacts had yet to be confirmed.

French Finance Minister Francois Baroin, whose country currently holds the G-7 presidency, said he had been in close contact with his G-7 counterparts "throughout the previous days and also this very morning."

"We'll be carefully watching the evolution of what might happen on Monday," Baroin told France's RTL radio, without providing details on the contacts. The G-7 members are Britain, Canada, France, Germany, Italy, Japan and the U.S.

The G-7 contacts come after one of the worst weeks in global financial markets since the collapse of U.S. investment bank Lehman Brothers in 2008.

Stabilizing Italy and Spain is set to be the biggest test for the 17-country eurozone, since their large economies are likely too big to support with full-blown bailouts.

Because of that, eurozone leaders last month decided to give their bailout fund new pre-emptive powers, such as the ability to buy distressed government bonds on the open market like the ECB, extend short-term credit lines or help re-capitalize struggling banks.

However, those new powers have not been implemented yet — a process that may take until early September unless national parliaments are called back from their summer recess. Analysts also warn that at the moment, the bailout fund is too small to successfully use its new tools.

Mansoor Mohi-uddin, a managing director at UBS, warned that besides undermining investor confidence in the U.S., S&P's downgrade may herald similar action from rating agencies on other top-rated countries.

"The sovereign ratings of other AAA rated countries like the U.K. and France are likely to come under question," Mohi-uddin said in a note.

Summary of Meeting Agenda

Few details have been released on the "secret" meetings but I have a list of agenda items in advance.

How to kick the can down the road
How to make it look like we are not kicking the can down the road
How to get Germany to agree to kick the can down the road
How to silence Germany if Germany refuses to kick the can down the road

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Reserve Currency Curse: Idea China to Stop Buying Treasuries After S&P Downgrade is Fallacious; US Would Welcome China Not Buying US Treasuries!

Posted: 06 Aug 2011 10:09 AM PDT

Comments abound on the significance of the S&P downgrade of US debt. Some think it will affect the stock market open on Monday. I don't, but if it does, I suggest it will last at most a day.

In "On the S&P ratings move" Bruce Krasting said essentially the same thing on the lasting effect, however he expects "interesting market action come Sunday night as this news is digested."

Moreover, if there is "interesting action" Sunday evening, it may not have anything to do with the rating cut at all. Rather, I suspect it will be in relation to the ECB confirming it will buy Italian debt.

What got my attention in Krasting's article was a fallacious, yet widely repeated set of statements "I don't expect to see some big headline that says, 'China to sell'. That's not going to happen. The critical issue is, 'Will they buy more?' I doubt they will."

The first sentence is true. However, the idea China will stop buying US debt is complete silliness.

Trade Deficit Math

The rationale for my statement is a simple mathematical identity. There can be no dispute of it. Yet, people dispute it all the time. I have a brilliant writeup from Michael Pettis on this very issue that I received a few days ago via email.

The timing is perfect. Michael Pettis writes ....

Foreign capital, go home!

Is the PBoC going to stop buying USG bonds? Once again we are hearing worried noises from various sectors about the possibility of a reduction in Chinese purchases of USG bonds.

The threat of a looming US default seems to be driving this renewed concern, although I am not sure that the PBoC really is worried about not getting its money back. After all if the US defaults, it will be mainly a technical default that will certainly be made good one way or the other. Since the PBoC doesn't have to worry about mark-to-market losses, unlike mutual funds, I think for China this is largely an economic non-event (not that there isn't good mileage in pointing to the sheer silliness of the US political process). Still, for domestic political reasons it needs to be seen huffing and puffing over American irresponsibility.

Xia Bin, an adviser to the central bank, told reporters earlier this month that China should speed up reserve diversification away from dollars to hedge against risks of the US currency's possible long-term decline.

Let's leave aside the fact that every six months we have heard the same thing for the past several years, and nothing has happened, shouldn't we nonetheless be worried? Won't reduced PBoC purchases be disruptive to the US economy and to the US Treasury markets?

No, they won't, and anyway they aren't going to happen.

Muddled Thinking

There is so much muddled thinking on the issue, even from economists who should know better, that I thought I would try to address what it would mean if the PBoC were actually serious and not simply making noises aimed at domestic political constituents.

First of all, remember that the PBoC does not purchase huge amounts of USG bonds because it has a lot of money lying around and doesn't know what to do with it. Its purchase of USG bonds is simply a function of its trade policy.

You cannot run a current account surplus unless you are also a net exporter of capital, and since the rest of China is actually a net importer of capital (inward FDI and hot money inflows overwhelm capital flight and outward FDI), the PBoC must export huge amounts of capital in order to maintain China's trade surplus. In order the keep the RMB from appreciating, in other words, the PBoC must be willing to purchase as many dollars as the market offers at the price it sets. It pays for those dollars in RMB.

What does the PBoC do with the dollars it purchases? Because it is such a large buyer of dollars, it must put them in a market that is large enough to absorb the money and – and this is the crucial point – whose economy is willing and able to run a large enough trade deficit.

Simple Math

This last point is what everyone seems to forget when discussing Chinese purchases of foreign bonds. Remember that when Country A exports huge amounts of money to Country B, Country A must run a current account surplus and Country B must run the corresponding current account deficit. In practice, only the US fulfills those two requirements – large and flexible financial markets, and the ability and willingness to run large trade deficits – which is why the PBoC owns huge amounts of USG bonds.

If the PBoC decides that it no longer wants to hold USG bonds, it must do something else. There are only four possible paths that the PBoC can follow if it decides to purchase fewer USG bonds.

The PBoC can buy fewer USG bonds and purchase more other USD assets.
The PBoC can buy fewer USG bonds and purchase more non-US dollar assets, most likely foreign government bonds.
The PBoC can buy fewer USG bonds and purchase more hard commodities.
The PBoC can buy fewer USG bonds by intervening less in the currency, in which case it does not need to buy anything else.

Since these are the only ways that the PBoC can reduce its purchases of USG bonds, we can go through each of these scenarios to see what would happen and what the impact might be on China, the US, and the world. We will quickly see that none of them imply calamity. On the contrary, every outcome is neutral or positive for the US.

To make the explanation easier, let's simply assume that the PBoC sells $100 of USG bonds. Since the balance of payments must balance, this immediately implies that there must be corresponding changes elsewhere in trade and capital flows.

1. The PBoC can sell $100 of USG bonds and purchase $100 of other USD assets.

In this case there has been no change in the balance of payments and basically nothing else would change. The pool of US dollar savings available to buy USG bonds would remain unchanged (the seller of USD assets to China would now have $100 which he would have to invest, directly or indirectly, in USG bonds), China's trade surplus would remain unchanged, and the US trade deficit would remain unchanged. The only difference might be that the yields on USG bonds will be higher by a tiny amount while credit spreads on risky assets would be lower by the same amount.

2. The PBoC can sell $100 of USG bonds and purchase $100 of non-US dollar assets, most likely foreign government bonds.

Since in principle the only market big enough is Europe, let's just assume that the only alternative is to buy $100 equivalent of euro bonds issued by European governments. The analysis doesn't change if we include other smaller markets.

There are two ways the Europeans can respond to the Chinese switch from USG bonds to European bonds. On the one hand they can turn around and purchase $100 of USD assets. In this case there is no difference to the USG bond market, except that now Europeans instead of Chinese own the bonds. What's more, the US trade deficit will remain unchanged and the Chinese trade surplus also unchanged.

But Europe might be unhappy with this strategy. Since there is no reason for Europeans to buy an additional $100 of US assets simply because China bought euro bonds, the purchase will probably occur through the ECB, in which case Europe will be forced to accept an unwanted $100 increase in its money supply (the ECB must create or borrow euros to buy the dollars).

On the other hand, and for this reason, the ECB might decide not to purchase $100 of US assets. In that case there must be an additional impact. The amount of capital the US is importing must go down by $100 and the net amount that Europe is importing must go up by that amount.

Will this reduction in US capital imports make it more difficult to fund the US deficit? Not at all. On the contrary – it might make it easier. If US capital imports drop by $100, by definition the US current account deficit will also drop by $100, almost certainly because of a $100 contraction in the trade deficit (the US dollar will decline against the euro, making US exports more competitive and European imports less competitive).

A contraction in the US trade deficit is of course expansionary for the US economy. Since the purpose of the US fiscal deficit is to create jobs, and a $100 contraction in the trade deficit will also create jobs, the US fiscal deficit will contract by $100 for the same level of job creation – perhaps even more if you believe, as most of us do, that increased trade is a more efficient creator of productive jobs than increased government spending.

In other words although there is $100 less demand for USG bonds, there is also $100 (or more) less supply of USG bonds, in which case there is no need for a price adjustment.

This is the key point. If foreigners buy fewer USD assets, the US trade deficit must decline. This is almost certainly good for the US economy and for US employment. When analysts worry that China might buy fewer USG bonds, they are actually worrying that the US trade deficit might contract. This is something the US should welcome, not deplore.

But the story doesn't end there. What about Europe? Since China is still exporting the $100 by buying European government bonds instead of USG bonds, its trade surplus doesn't change, but of course as the US trade deficit declines, the European trade surplus must decline, and even possibly go into deficit. This is because by selling dollars and buying euro, China is forcing the euro to appreciate against the dollar.

This deterioration in the trade account will force Europeans either into raising their fiscal deficits to counteract the impact of fewer exports or letting domestic unemployment rise. Under these conditions it is hard to imagine they would tolerate much Chinese purchase of European assets without responding eventually with anger and even trade protection.

3. The PBoC can sell $100 of USG bonds and purchase $100 of hard commodities.

This is no different than the above scenario except now that the exporters of those hard commodities must face the choice Europe faced above.

Stockpiling commodities, by the way, is a bad strategy for China but one that it seems nonetheless to be following to some extent. Commodity prices are very volatile, and unfortunately this volatility is inversely correlated with Chinese needs.

Since China is the largest or second largest purchaser of most commodities, stockpiling commodities is a good investment only if China continues growing rapidly, and a bad investment if its growth slows. This is the wrong kind of balance sheet position any country should engineer. It simply exacerbates underlying conditions and increases economic volatility – never a good thing, especially for a very poor and undeveloped economy like China's.

4. The PBoC can sell $100 of USG bonds by intervening less in the currency, in which case it does not need to buy anything else.

In this case, which is the simplest of all to explain, China's trade surplus declines by $100 and the US trade deficit declines by $100 as the RMB rises.

The net impact on US financing costs is unchanged for the reasons discussed above (a lower trade deficit permits a lower fiscal deficit). Chinese unemployment will rise because of the reduction in its trade surplus unless it increases its own fiscal deficit. Beijing, of course, is in no hurry to try out this scenario.

It's about trade, not capital

This may sound counterintuitive to all except those who understand the way the global balance of payments work, but countries that export capital are not doing anyone favors unless incomes in the recipient country are so low that savings are impossible or unless the capital export comes with needed technology, and countries that import capital might be doing so mainly at the expense of domestic jobs.

China's Worry, Not US

For this reason it is absurd for Americans to worry that China might stop buying USG bonds. This is what the Chinese worry about.

In fact the whole US-China trade dispute is indirectly about China's insistence on purchasing USG bonds and the US insistence that they stop. Because remember, if the Chinese trade surplus declines, and the US trade deficit declines too, by definition China is directly or indirectly buying fewer US dollar assets, which in principle means fewer USG bonds.

And contrary to much of what you might read, this reduction in USG bond purchases will not cause US interest rate to rise at all. For those who insist that it will, it is the equivalent of saying that the higher a country's trade deficit, the lower its domestic interest rates. This statement is patently untrue.

US Would Welcome China Not Buying US Treasuries

Pettis makes an irrefutable mathematical analysis that shows the idea the US should fear the day foreigners especially China would stop buying US treasuries is silliness.

Let's look at this from another point of view. Congress, the president, Bernanke, and many others all want the RMB (Yaun) to rise.

If the Yuan rises in value vs. the US dollar, the other side of the mathematical equation says the US trade deficit with China will shrink and China's unemployment rate will rise.

China, fearing unrest does not rising unemployment. Thus, in spite of all the misguided huffing and puffing of numerous analysts, it is China who fears not buying US debt. Otherwise, they would not buy it!

Curse of Global Reserve Currency

The benefit (if one can call it a benefit) to having the world's reserve currency is the ability to finance endless wars and live beyond one's means. The mathematical counterpart is being at the mercy of foreigners on trade wars, outsourcing, and unemployment.

What's the Solution?

I have pointed out the solution several times, but this is a good time to repeat it.

Global Trade Solution: Hugo Salinas Price and Michael Pettis on the Trade Imbalance Dilemma; Gold's Honest Discipline Revisited

Bear in mind Pettis does not agree with a return to the gold standard.

Please see Michael Pettis Warns of "Virulent Political Turn Against Euro", Adds Clarification to "Gold's Honest Discipline" for additional comments from Michael Pettis.

Why China Will Not Stop Buying US Assets Recap

China's unemployment would rise and so would its social problems. There are counterbalancing benefits but the former is what has China's attention now. Eventually the market will force China's hand, but when that happens it will be good for the US, exactly the opposite of what most think.

China will not stockpile commodities as a solution because that is pro-cyclical. China has too much infrastructure building already and will cut back. Moreover, stockpiling commodities would add to China's massive price inflation problem. Thus, stockpiling of commodities is the last thing China needs to do.

The US and possibly European markets are the only ones big enough and liquid enough to park reserves. Buying European assets would just transfer the problem to Europe. Moreover, Europe would resit far more forcefully than the US has.

Those are the hard realities of what is essentially a mathematical identity. One can debate what China should do and the consequences of proposed actions, but the math is not in question.

Pettis is formulating a non-gold-based solution and when it is finalized, I will get a look. I do not have a timeline on that.

In the meantime, the US worry is not that China will stop buying US treasuries, but rather the exact opposite.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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