ECB must buy ‘hundred of billions’ of bonds to tame Europe’s debt crisis

By Ambrose Evans-Pritchard
Published: 8:19PM BST 17 Jun 2010

Brian Coulton, the agency’s head of sovereign ratings, said German members of the ECB appeared to be blocking the sort of muscular intervention in southern European bond markets needed to restore the shattered confidence of investors.

The ECB agreed to start buying Greek, Portuguese, and Irish bonds in April to help buttress the EU’s `shock and awe’ package, known as the European Financial Stability Facility. Total purchases so far have been €47bn (£39bn).

It has focused its firepower on Greece, mopping up some €25bn of government bonds. This has prevented a collapse of the Greek debt market but at the high political price of letting banks and funds dump their holdings onto the EU taxpayer. Read more»

Reality of America’s fiscal mess starting to bite

Gillian Tett, www.ft.com, 06/17/2010

If you pop into a toilet on the Seattle waterfront this summer, you might see over-flowing bins. The reason? A polite notice explains that “because of 2010 budget reductions”, the Seattle government can no longer afford to “service this comfort station” each day. Hence the dirt.

Investors would do well to take note. In recent months, America’s fiscal mess has assumed a rather surreal air. On paper, the country’s federal-level deficit and debt numbers certainly look very scary. But in practical terms, the impact of those ever-swelling zeroes still seems distinctly abstract.

After all, so far the federal government has not been slashing spending; on the contrary, there was a stimulus bill last year. And, as my colleague John Plender pointed out this week, Treasury bond yields have been falling as investors flee the eurozone woes. As a result, those scary numbers still seem to be a problem primarily concocted in the world of cyber finance.

But there is one place where reality is already starting to bite in America and that is in terms of state finances. Just look at the statistics. A report from the US Center on Budget and Policy Priorities issued last month estimates that in fiscal 2010 the US states collectively posted a $200bn-odd budget shortfall, equivalent to 30 per cent of all state budgets.

Read more»

Doug Noland’s Credit Bubble Bulletin

www.prudentbear.com, 60/18/2010

[Weekly News Review - Selections]

June 15 – Bloomberg (Brian Faler):  “Voters are forcing Democrats into an election-year equation they may be unable to solve: How to spend more money to create jobs and at the same time reduce the deficit. Democrats have abandoned billions of dollars in proposed jobs initiatives to avoid adding to the deficit, risking that a pending bill may now seem ineffective to the 15 million unemployed. To further cut costs, they added more than $50 billion in taxes on buyout managers, oil companies and other businesses, seized upon by Republicans as job killers.  Yet there are few signs Democrats’ contortions to avoid adding to the deficit are winning over voters, especially when the savings are compared with this year’s $1.5 trillion shortfall.  ‘We’re in a vise,’ said Representative Gerald Connolly… ‘It’s a real dilemma.’”

June 16 – Bloomberg (Katrina Nicholas):  “A wave of maturing debt may ‘wash away’ some speculative-grade U.S. companies as Europe’s sovereign crisis pushes up borrowing costs and credit markets freeze, according to Standard & Poor’s.  Junk-rated borrowers led by ‘consumer-dependent companies’ will struggle to ‘refinance at the rates they’ll need for long-term survival, if they can find financing at all,’ S&P said… U.S. non-financial corporate borrowers have more than $1.7 trillion of bonds and loans due from 2011 through 2014, and those rated BB+ or below may ‘encounter serious hurdles to their refinancing needs,’ S&P managing director John Bilardello said…”

June 18 – Bloomberg (Pham-Duy Nguyen):  “Gold futures rose to a record $1,263.70 an ounce in New York as Europe’s fiscal woes and dimming prospects for the U.S. economy prompted investors to step up purchases of bullion as an alternative asset…   ‘The problems over in Europe are just as pernicious over here in the U.S.,’ said Michael Pento, the chief economist at Delta Global Advisors Inc. ‘You can’t trust sovereign debt and sovereign currency. Gold is the only real honest money that we have.’”

Read more»

A Prominent Indicator of Financial Conditions

Doug Noland, www.prudentbear.com, 06/18/2010

Markets now appreciate that massive stimulus can’t assure market stability.  Indeed, further deterioration in government finances is now recognized as creating instability, uncertainty, and heightened systemic risk…

I would find it very surprising if the European debt crisis did not mark a key inflection point for the global leveraged speculating community.

I would like to follow up on last week’s examination of the Fed’s “flow of funds” data with more focus on Financial Conditions.  Over the past seven quarters (back to Q2 2008), Federal borrowings have increased $3.274 TN, or 49%, to $9.972 TN.  Over the same period, GDP increased $104bn, or 0.7%, to $14.601 TN.  This massive fiscal expansion was instrumental in stabilizing the economy.  It certainly wasn’t the only factor.

In just 21 months, Federal Reserve assets expanded $1.387 TN, or 146%, to $2.339 TN.  Of course, the Fed also stoked ultra-loose financial conditions when it dropped short-term interest-rates to near zero.  From the high in January 2009, Money Market Fund Assets declined $1.1 TN, an unprecedented outflow of finance upon global risk markets.  Renewed Risk Embracement by the global leveraged speculating community played a pivotal role in loosening Financial Conditions, although there is little transparency when it comes to securities leveraging, “carry trades,” sophisticated derivatives and other global sources of finance for speculation. Read more»

The Real Legacy of Alan Greenspan

Ryan McMaken, www.LewRockwell.com, 06/15/10

Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, by Frederick Sheehan, 2010, McGraw Hill

For those of us who were mere economics undergraduates in the 1990’s, Alan Greenspan was rather like a god. Admittedly, the vision of Greenspan handed down to the undergrads by the faculty wasn’t one of vulgar hero-worship. Greenspan’s mumblings and evasions were, after all, treated with bemusement by the faculty. But, there was the feeling that Greenspan, for all his lack of clarity, seemed to understand things that the rest of humanity didn’t understand, and there was indeed faith in the idea that he must possess almost supernatural powers in fine-tuning the economy to ensure economic prosperity indefinitely.

Later, some of us were cured of the Greenspan religion by Austrian economics, but for most, the image of Greenspan as The Maestro (to use the term popularized by Bob Woodward) continued right up until even the fall of 2008 when The Panic set in.

Greenspan’s reputation has suffered since then, although many still pay him six-figures for 45 minutes of his wisdom. And, while Greenspan himself may be having trouble portraying himself as a mere innocent bystander in the current economic collapse, Greenspan’s policies are alive and well in his successor. Ben Bernanke has shown that Greenspanism at the fed is in no danger of going away. Easy money in the form of subterranean interest rates, microscopic reserve requirements, and endless praise of debt was Greenspan’s eternally favorite strategy, and Bernanke clearly plans to continue the binge indefinitely. Read more»

The Huffington Post, June 15, 2010

Richard Fisher, Senior Fed Official: White House Is Dead Wrong

Richard Fisher, president of the Dallas Fed, has long been a proponent of serious financial sector reform.  As a former commercial banker, he sees quite clearly that the legislation now headed into “reconciliation” between House and Senate versions amounts to very little.  He also knows that pounding away repeatedly on this theme is the best way to influence his colleagues within the Fed and across the policy community more broadly.

He is now taking his game to a new, higher level.  Couched in the diplomatic language of senior officials, his speech on June 3 to the SW Graduate School of Banking was both a carefully calibrated assault on the administration’s general “softly, softly” approach to the big banks and a direct refutation of arguments put forward by Larry Summers in particular.

As the title of Mr. Fisher’s speech implies, if the legislation is not real financial reform (and it is not, according to him), then our current policy trajectory amounts to facilitating further rounds of financial dementia. Read more»

Doug Noland’s Credit Bubble Bulletin

www.prudentbear.com, 06/11/2010

[Weekly News Review - Selections]

Fiscal Watch:

June 9 – Bloomberg (Rodney Jefferson):  “Edinburgh’s two biggest fund companies have a warning to investors: don’t overlook the U.S. when scouring the world for nations with too much debt.  Standard Life Investments is questioning when… Obama’s administration can reduce borrowings, said Andrew Milligan, the company’s head of global strategy. Scottish Widows Investment Partnership sold U.S. stocks in March on concern an eventual reduction in spending would weigh on economic growth. The amount of total marketable U.S. debt outstanding has risen to $7.96 trillion from $4.4 trillion in mid-2007.  ‘I don’t know how long the U.S. can afford not to focus on the issue and take action,’ Ken Adams, the top strategist at Scottish Widows, said… ‘It’s like Greece. It’s very hard to pick the point at which confidence suddenly goes.’”

June 8 – Reuters:  “The U.S. debt will top $13.6 trillion this year and climb to an estimated $19.6 trillion by 2015, according to a Treasury Department report… The report that was sent to lawmakers Friday night with no fanfare said the ratio of debt to the gross domestic product would rise to 102% by 2015 from 93% this year.”

June 9 – New York Times (David E. Sanger and Sewell Chan):  “At a moment when many economists warn that the American economic recovery is likely to be imperiled by prolonged high unemployment and slow growth, President Obama is discovering that the tools available to him last year — a big economic stimulus and action by the Federal Reserve — are both now politically untenable.  The mood in both parties of Congress has turned decidedly anti-deficit, meaning that the job-creation programs once favored by the White House and Democratic leaders in Congress have been cut back, then cut again.” Read more»

Why Governments Hate Gold

by Ron Paul at Lew Rockwell.com

This past week several emerging and ongoing crises took attention away from the ongoing sovereign debt problems in Greece. The bailouts are merely kicking the can down the road and making things worse for taxpaying citizens, here and abroad. Greece is unfortunately not unique in its irresponsible spending habits. Greek-style debt explosions are quickly spreading to other nations one by one, and yes, the United States is one of the dominoes on down the line.

Time and again it has been proven that the Keynesian system of big government and fiat paper money are abject failures in the long run. However, the nature of government is to ignore reality when there is an avenue that allows growth in power and control. Thus, most politicians and economists will ignore the long-term damage of Keynesianism in the early stage of a bubble when there is the illusion of prosperity, suggesting that the basic laws of economics had been repealed. In fact, one way to tell if a bubble is about to burst is if economists start talking about how the government and the Central Bank have repealed the business cycle. Read more»

U.S. Facing Debt ‘Super Cycle’

Barack Obama’s record spending has prompted warnings of a debt super cycle

Mail Foreign Service, www.dailymail.co.uk, 06/07/2010

America’s $13trillion debt is set to overtake the country’s GDP within the next two years as economists warn of a ‘debt super cycle.’

Forecasters predict the U.S. debt will grow to surpass gross domestic product in 2012, based on data from the International Monetary Fund.

According to Bloomberg, the world’s largest economy will expand at a slower pace than the 3.2 per cent average of the past five decades.

It comes as Barack Obama borrows record amounts to fund spending programs to help the economy recover from its longest recession since the 1930s. Read more»

The Recovery Starts With Sound Money

Judy Shelton, online.wsj.com, 05/27/2010

The willingness to work for the sake of future prosperity is a universal human quality, but people must believe there is a link between effort and reward.

The euro is beset with fiscal calamities that threaten its downfall, and markets in the U.S. are roiled by uncertainty over the government’s financial regulatory legislation. But don’t worry. Treasury Secretary Timothy Geithner meets with European finance officials today to discuss the economic situation. According to a Treasury Department statement, they will focus on “measures being taken to restore global confidence and financial stability.” So everything is under control.

Right.

What government policy makers in the U.S. and Europe fail to realize is that far from being seen as capable of delivering economic salvation, they are increasingly perceived as primary contributors to global financial ruin. Whether it’s the fiscal recklessness of spendthrift politicians or the refusal of government officials to acknowledge failings—distorting mortgage markets through Fannie Mae and Freddie Mac, skewing assessments of credit risk through loose monetary policy—the influence of government over the real economy is proving disastrous. Read more»