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Archives of May 2010
US faces one of biggest budget crunches in world – IMF
May 14th, 2010, www.telegraph.co.uk
Earlier this week, the Bank of England Governor, Mervyn King, irked US authorities by pointing out that even the world’s economic superpower has a major fiscal problem -“even the United States, the world’s largest economy, has a very large fiscal deficit” were his words. They were rather vague, but by happy coincidence the International Monetary Fund has chosen to flesh out the issue today. Unfortunately this is a rather long post with a few chunky tables, but it is worth spending a bit of time with – the IMF analysis is fascinating.
Its cross-country Fiscal Monitor is not easy reading and is a VERY big pdf (17mb), so I’ve collected a few of the key points. The idea behind the document is to set out how much different countries around the world need to cut their deficits by in the next few years, and the bottom line is it’s going to be big and hard (ie 8.7pc of GDP in deficit cuts around the world, which works out at, gulp, about $4 trillion).
But the really interesting stuff is the detail, and what leaps out again and again is how much of a hill the US has to climb. Exhibit a is the fact that under the Obama administration’s current fiscal plans, the national debt in the US (on a gross basis) will climb to above 100pc of GDP by 2015 – a far steeper increase than almost any other country.
Dysfunctional Markets
Doug Noland, www.prudentbear.com, 05/14/2010
It was fundamental to Greenspan/Bernanke doctrine to deal with market and economic fragility through the aggressive reflation of system Credit. This doctrine of inflationism was instrumental in nurturing Credit and speculation excesses… The ECB’s big mistake was not to have forcefully fought the Fed.
My bearish thesis on our markets and economy is based upon the view that the financial fuel for our recovery has been unsound, unstable and unsustainable. This “Monetary Process” is now in jeopardy. The Global Government Finance Bubble, which lunged into its terminal phase of excess with the collapse of the Wall Street/mortgage finance Bubble, has been pierced.
It scrolled by quickly Wednesday afternoon on my Bloomberg screen: a one-line headline quoting ECB Executive Board member Jose Manuel Gonzalez-Paramo: “Central Banks Can’t Work if Markets Dysfunctional.” My efforts to locate Mr. Gonzalez-Paramo’s full comments on the issue were unsuccessful; we’ll have to assume the context. I do believe strongly that many things these days can’t work because global markets are hopelessly dysfunctional.
Doug Noland’s Credit Bubble Bulletin, www.prudentbear.com, 05/14/201
[Week's News Digest - Selections]
May 11 – Finanacial Times (David Oakley and Ralph Atkins): “Investors on Tuesday warned that the European Central Bank would have to introduce quantitative easing to stave off the worst crisis in the eurozone since it was launched 11 years ago. The ECB has resisted following the Bank of England and the US Federal Reserve in expanding the money supply by buying government bonds because it fears that it could stoke inflation. Although eurozone central banks bought eurozone government bonds this week for the first time as part of the international rescue plan, this is not QE as the ECB is funding this by selling German bunds or using commercial bank deposits.”
May 13 – Bloomberg (Vincent Del Giudice): “The U.S. posted its largest April budget deficit on record as receipts declined in a month that typically sees an increase in individual income tax payments. The excess of spending over revenue rose to $82.7 billion last month compared with a $20.9 billion gap in April 2009… April marked a record 19th straight monthly shortfall… Deterioration in the government’s balance sheet in coming years raises the risk of higher interest rates even as an improving economy helps lift tax receipts. ‘With the recovery in place, we should be seeing higher revenue and lower outlays, not the other way around,’ said Win Thin, senior currency strategist at Brown Brothers Harriman…For the fiscal year that began in October, the budget deficit totaled $799.7 billion compared with $802.3 billion during the same period last year.
Mission Gainsborough – The ECBs Brilliant Plan
Kris Sayce, www.moneymorning.com.au. 05/11/2010
The Bank of Japan? Check.
The Reserve Bank of Zimbabwe? Check.
The United States Federal Reserve? Check.
The Bank of England? Check.
The European Central Bank? Check.
The Reserve Bank of Australia? [Silence].
Not yet, reader. Will its time come to openly and brazenly print money?
We know it and the retail banks do it behind closed doors. But it hasn’t yet announced a multi-billion dollar plan to monetise debt obligations. Of course, so far it hasn’t had to because thanks to the “we’re different” mentality, Australians have continued to make sure private sector debt continues to rise.
For instance, according to the Reserve Bank of Australia (RBA), as of March 2010 residential loans by banks stood at $935.2 billion. Read more»
Trillion Dollar Madness
Robert Wenzel, www.economicpolicyjournal.com, 05/10/2010
European policy makers have unveiled an unprecedented loan package worth almost $1 trillion and a program of bond purchases to stop the sovereign-debt crisis. The Federal Reserve will also play a role through currency swaps.
The 16 euro nations agreed in a statement to offer as much as 750 billion euros ($962 billion), including International Monetary Fund backing, to countries facing instability and the European Central Bank said it will buy government and private debt.
There is nothing more to be said other than this is potentially the greatest inflationary plan ever designed. Although statements have been made in the past that the EU has failed to follow through on, the statements issued last night appear to have a sense of seriousness about them, especially the ECB announcement to buy government and private debt, and the Federal Reserve launching of currency swaps. Both these actions suggest spectacular inflation may not be far away. Although the ECB statement says the purchases will be sterilized, meaning they won’t increase the overall money supply in the system, one wonders how long this will go on. A sterilization of the money printing would mean that money would be drained out of other sectors of the EU economy to be given to the governments of the PIIGS, who are proven irresponsibles with money. Draining from the potentially productive sectors of the EU economy to give to the PIIGS is almost as insane as printing the money without sterilization.
Read more»
The Gold Standard: The Case for Another Look
Sean Fieler and Jeffrey Bell, online.wsj.com, 05/07/2010
The rise of the tea party movement is a sign that voters may be prepared to consider unorthodox proposals.
Washington’s elites are quietly preparing a post-election fiscal compromise that will fund much of President Barack Obama’s domestic spending agenda with huge tax increases. They aim to create a value-added tax and will argue that there is no alternative even though doing so will leave the United States resembling the stagnant, bureaucratic nations of Western Europe.
“Liquidationist” Revisited
Doug Noland, www.prudentbear.com, 05/07/2010
…“old timers” understood that the only way to return balance and monetary order to the system was through quashing speculation, financial excess and economic profligacy. And this view was much more based on the understanding of the inherent instability of Credit inflations than it was a “puritanical” judgment.
The “inflationists” would argue that fiscal and monetary stimulus was essential for fostering U.S. economic recovery. A “liquidationist” (“anti-inflationist”) would counter with the argument that the cost of Trillions of additional government debt and related marketplace distortions far outweigh what will prove ephemeral benefits.
John Maynard Keynes dismissed the “austere and puritanical” “liquidationists.” Over the years, Chairman Bernanke has similarly ridiculed the “Bubble poppers” – those in the late 1920’s that believed the Fed needed to tighten policy to rein in out of control securities leveraging, speculation and economic imbalances. Dr. Bernanke has blamed “overzealous” central banking for contributing to the Great Depression.
Doug Noland’s Credit Bubble Bulletin, www.prudentbear.com, 05/07/2010
[Selected Notes]
May 7 – Bloomberg (Shannon D. Harrington): “The 13-month rally in credit markets is unraveling… Money markets showed banks may be the most reluctant to lend to each other in six months and a derivatives index used to protect against European bank failures soared the most on record. U.S. company bond sales are poised for the slowest week this year, while in Europe they all but disappeared…”
May 4 – Bloomberg (Simon Kennedy): “European Central Bank President Jean-Claude Trichet, who capitulated on a January pledge not to relax lending rules for the sake of one country, may have to sacrifice more principles to prevent Greece from bringing down the euro. Trichet yesterday diluted rules for the second time in a month to guarantee the ECB will keep taking Greek government bonds as collateral for loans. The central bank may have to extend that to other nations, renew a program of lending unlimited cash to banks for a year, and even start buying government debt if the 110 billion-euro ($146 billion) bailout plan for Greece fails to stem the euro’s slide, economists said.”
One-month Treasury bill rates ended the week at 7 bps…Two-year government yields dropped 14 bps to 0.74%. Five-year T-note yields sank 23 bps to 2.13%. Ten-year yields fell 23 bps to 3.42%. Long bond yields dropped 25 bps to 4.27%…
…Corporate bond spreads widened. An index of investment grade bond spreads widened an eye-opening 35 to 128 bps.
Ignoring the Elephant in the Bailout
Gretchen Morgenson, http://dealbook.blogs.nytimes.com, 05/10/2010
Mr. Baker’s concern that Freddie may be racking up losses by overpaying for mortgages derives from his suspicion that the government might be encouraging it to do so as a way to bolster the operations of mortgage lenders….That would make Fannie’s and Freddie’s mortgage-buying yet another backdoor bailout of the nation’s banks
If you blinked, you might have missed the ugly first-quarter report last week from Freddie Mac, the mortgage finance giant that, along with its sister Fannie Mae, soldiers on as one of the financial world’s biggest wards of the state.
Freddie — already propped up with $52 billion in taxpayer funds used to rescue the company from its own mistakes — recorded a loss of $6.7 billion and said it would require an additional $10.6 billion from taxpayers to shore up its financial position. Read more»
Tuesday April 27, 2010
Doug Noland, www.prudentbear.com, 04/30/2010
…[M]ost will argue, perhaps even persuasively, that European debt market tumult will have little impact on our market and economic recoveries…But fragility is inherent to Bubbles, and contagion is fundamental to Bubble risk…[A]s confidence falters, previous risk misperceptions are comprehended and complacency is abandoned – greed morphs to fear and the dominoes begin to tumble.
Tuesday April, 27, was not a good day for Goldman, for proprietary trading, for the OTC derivatives marketplace or for private-sector risk intermediation…The Street’s new realities will make it more difficult for private-sector Credit to anytime soon supplant Washington’s Credit juggernaut. From my perspective, this equates to massive deficits – for bigger and longer.
My secular bearish view is premised on the Serial Bubble Thesis: the current backdrop is the product of more than two decades of ever-expanding Bubbles and increasingly expansive government reflationary measures. Post-Wall Street/mortgage finance Bubble reflation is fomenting the current Bubble, which I have coined the “global government finance Bubble.” It’s a Bubble built on the most fragile underpinnings.
This week I found myself pondering parallels between two historic Bubbles.