On Monday August 8th, the cost of CDS and bond yields of both France and Germany went up, when one would have expected them to go down with the ECB buying Italian and Spanish bonds. The euro also declined in value to the Scandinavian currencies, which would indicate the Scandinavian currencies were perceived as safer. Together, France and Germany constitute 1/3 of the equity of the ECB and are the two largest economies in the eurozone. France's AAA credit rating became the target of market rumors that it could be downgraded as the result of the United States downgrade and the realization the ECB bond buying would be a temporary stop gap on Spanish and Italian yields with the EFSF needing significant expansion if it was to have the economic resources to handle intervention into Spain and/or Italy. France has gained the perception of being in the market eurozone crisis crosshairs with the illusion that Germany would be the remaining safe haven, despite its bond yields and CDS also going up. Standard and Poor's was quick to state publicly that France is more serious in addressing its public debt than the United States and is implementing higher taxes and spending austerity, which is not very encouraging because France is suffering from slowing growth just as Spain, Italy, and Germany are to different degrees.
The realization that bond buying by the ECB will only be temporary and the EFSF will need more money and the creation of eurobonds, as we have advocated, may actually be unavoidable has caused overnight lending to tighten and eurozone banks to be perceived as more risky sending bank shares down lead by the French banks SocGen and CreditAgricole. Rumors of a French bank having problems pervaded the market, while the more likely reality was a recognition of broader macroeconomic issues of growth and deteriorating eurozone stability with the euro effectively being shorted and the decline in bank equity values only magnifying the potential need of eurozone banks to raise capital. At least one Asian bank cut the credit lines of French banks. The willingness of banks to lend to each other continued to diminish with more pressure on short term lending raising questions of pressure on the long end of lending and the increasing likelihood the ECB would have to do much more to maintain liquidity besides by sovereign debt.
Commerzbank, which is 25% owned by the German government, announced it's profits would decline 93% on Greek debt writedowns and its shares still went up 4.5% on Wednesday, but the illusion that German banking is strong and Commerzbank (and any other German bank or landesbank that discloses risks or funding needs) is a special case continues to be promulgated. The continuing uncertainty of the eurozone's continued failures in the deepening implementation of austerity and refusal to create a democratic fiscal union with eurobonds is showing itself in the declining equity value of European banks and the need of those banks to raise more capital in what is forming up as a potential global crisis.
Despite statements to the contrary, after the market in the United States closed Thursday, Spain, Italy, Belgium, and France banned short selling.
The euro was defectively constructed with fiscal union and the means to fiscally adjust eurozone internal trade imbalances legally prohibited creating a monetary union with no fiscal union transfer process as a sovereign nation with fiat money has and monetary union in which all of its sovereign nation members were effectively reduced to nations using and financing sovereign debt in a foreign currency (the euro). They are reaping the harvest of that crop.
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Friday, August 12, 2011
Thursday, August 11, 2011
Michael Pettis on Why China Needs to Buy United States Debt
In Michael Pettis' private newsletter which arrived July 31, he discussed two issues: 1) why China needs to buy U.S. debt and 2) hidden debt in China. I intend to cover why China needs economically to buy U.S. debt in this article and cover hidden debt in China in another article if time permits.
Pettis notes the growing concern over a possible U.S. default, which is unlikely, in China as political positioning since it would be a economically non-event for China. There has been speculation on whether China would sell its U.S. bonds in Chinese media, but Pettis' is emphatic that will not happen and the speculation is based on a fundamental misunderstanding of how China's purchase of U.S. bonds is a necessary 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."
When China buys those U.S. dollars it must put in a market large enough to absorb the money and whose economy is willing and able enough to run a trade deficit. "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 China were to decide it no longer wants to hold U.S. government bonds, there are only four possible choices if decides to purchase fewer U.S. government bonds:
With respect to #2, purchasing non-U.S. assets which would most likely be foreign government bonds, of which Europe is the only market large enough, there are only two ways the Europeans could react. One is the Europeans would turn around and buy a similar amount of U.S. assets and the U.S. and China trade balances would remain unchanged. Europe, however, might be unhappy with this, because it would probably be transacted through the ECB and cause an increase in the money supply, according to Pettis. If Europe was to not purchase U.S. assets, then the U.S. imports from Europe must go down that amount while the imports to Europe must go up that amount. This will actually improve the U.S. position and be expansionary for the U.S. economy by the creation of jobs. "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." For Europe it is another story, because as the US trade deficit declines the European trade surplus must decline while China's remains unchanged. "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."
With respect to #3, in which China buys hard commodities, the scenario is the same as above except the exporters of those hard commodities will face the same choices Europe would face. The exporters can either buy U.S. assets or absorb the deterioration in their trading account, perhaps through a reduction in manufacturing capacity. This scenario also has problems for China since stock piling commodities is a bad strategy since commodity prices are volatile and that volatility is inversely correlated with the needs of the Chinese economy. It would be a good investment for China only if China grows rapidly. This would be the wrong national economy balance sheet position any country could engineer as it would exacerbate underlying social economic conditions and increase economic volatility, which is never a good thing for the poor.
With respect to #4, in which China intervenes less in the currency and does not buy anything else, China's surplus will decline by the same amount and the U.S. trade deficit will decline by the same amount. The net change on U.S. financing costs would be unchanged, while China's unemployment would rise unless it increases its own fiscal deficit, which is politically undesirable.
Pettis concludes this first half of his private newsletter with "It's about trade, not capital", which is counterintuitive to many people who do not understand how the global balance of payments works, because "...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. For this reason it is absurd for Americans to worry that China might stop buying USG bonds. This is what the Chinese worry about." Despite the U.S.-China trade dispute about China buying U.S. government bonds and the U.S. not wanting them to do so, in reality, if China's trade surplus declines then the U.S. trade deficit declines, which means China buys less U.S. government bonds and, contrary to what you may read or hear, this reduction is purchases of U.S. government bonds would not cause the U.S. interest rate to fall. To insist otherwise is to say, if a country's trade deficit rises, its domestic interest rates decline which is patently false. Pettis brings up a standard argumentative response to his observations on trade and capital exports writing "...someone will indignantly point out a devastating flaw in my argument. Since the US makes nothing that it imports from China, they will claim, a reduction in China’s capital exports to the US (or a reduction in China’s trade surplus) will have no impact on the US trade deficit. It will simply cause someone else’s exports to the US to rise with no corresponding change in the US trade balance. In that case, they say, less Chinese buying of USG bonds will indeed cause an increase in US interest rates.
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Pettis notes the growing concern over a possible U.S. default, which is unlikely, in China as political positioning since it would be a economically non-event for China. There has been speculation on whether China would sell its U.S. bonds in Chinese media, but Pettis' is emphatic that will not happen and the speculation is based on a fundamental misunderstanding of how China's purchase of U.S. bonds is a necessary 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."
When China buys those U.S. dollars it must put in a market large enough to absorb the money and whose economy is willing and able enough to run a trade deficit. "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 China were to decide it no longer wants to hold U.S. government bonds, there are only four possible choices if decides to purchase fewer U.S. government 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."
With respect to #2, purchasing non-U.S. assets which would most likely be foreign government bonds, of which Europe is the only market large enough, there are only two ways the Europeans could react. One is the Europeans would turn around and buy a similar amount of U.S. assets and the U.S. and China trade balances would remain unchanged. Europe, however, might be unhappy with this, because it would probably be transacted through the ECB and cause an increase in the money supply, according to Pettis. If Europe was to not purchase U.S. assets, then the U.S. imports from Europe must go down that amount while the imports to Europe must go up that amount. This will actually improve the U.S. position and be expansionary for the U.S. economy by the creation of jobs. "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." For Europe it is another story, because as the US trade deficit declines the European trade surplus must decline while China's remains unchanged. "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."
With respect to #3, in which China buys hard commodities, the scenario is the same as above except the exporters of those hard commodities will face the same choices Europe would face. The exporters can either buy U.S. assets or absorb the deterioration in their trading account, perhaps through a reduction in manufacturing capacity. This scenario also has problems for China since stock piling commodities is a bad strategy since commodity prices are volatile and that volatility is inversely correlated with the needs of the Chinese economy. It would be a good investment for China only if China grows rapidly. This would be the wrong national economy balance sheet position any country could engineer as it would exacerbate underlying social economic conditions and increase economic volatility, which is never a good thing for the poor.
With respect to #4, in which China intervenes less in the currency and does not buy anything else, China's surplus will decline by the same amount and the U.S. trade deficit will decline by the same amount. The net change on U.S. financing costs would be unchanged, while China's unemployment would rise unless it increases its own fiscal deficit, which is politically undesirable.
Pettis concludes this first half of his private newsletter with "It's about trade, not capital", which is counterintuitive to many people who do not understand how the global balance of payments works, because "...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. For this reason it is absurd for Americans to worry that China might stop buying USG bonds. This is what the Chinese worry about." Despite the U.S.-China trade dispute about China buying U.S. government bonds and the U.S. not wanting them to do so, in reality, if China's trade surplus declines then the U.S. trade deficit declines, which means China buys less U.S. government bonds and, contrary to what you may read or hear, this reduction is purchases of U.S. government bonds would not cause the U.S. interest rate to fall. To insist otherwise is to say, if a country's trade deficit rises, its domestic interest rates decline which is patently false. Pettis brings up a standard argumentative response to his observations on trade and capital exports writing "...someone will indignantly point out a devastating flaw in my argument. Since the US makes nothing that it imports from China, they will claim, a reduction in China’s capital exports to the US (or a reduction in China’s trade surplus) will have no impact on the US trade deficit. It will simply cause someone else’s exports to the US to rise with no corresponding change in the US trade balance. In that case, they say, less Chinese buying of USG bonds will indeed cause an increase in US interest rates.
"No it won’t. Unless this other country steps up its capital exports to the US and replaces China – which is pretty unlikely, and which anyway would mean the same amount of foreign purchasing of USG bonds – it must cause a reduction in the US trade deficit."
The basic point is a reduction of Chinese exports to the U.S. would be matched by increase in the same amount of exports to the U.S. from a another foreign country which would then have the impact of either lowering that foreign country's exports to other countries (if it enjoyed full employment) or a rise in imports or the foreign country (if it has unemployment). What Pettis leaves unconsidered it what would happen if there is a global contraction.
Wednesday, August 10, 2011
Yves Smith: S&P Broke Law in Leaking US Downgrade
Yves Smith at NakedCapitalism wrote that the S&P leaked information of the US downgrade prior to the public announcement to banking clients on Thursday and hedge funds on Tuesday with Twitter alight with the information Friday morning effectively allowing the banks and hedge funds to pre-trade on the information, which was not publicly released until after the market on last Friday (8/6/2011). Such an act is specifically prohibited under SEC Rules.
I have been unable to find any other news coverage or discussion of this allegedly illegal conduct except, interestingly enough at Fox News in an article by Charlie Gasparino and a video of Gasparino on Fox News disclosing the leaks by S&P. EconProph is the only other source commenting on this and extensively quoted from Yves Smith's article.
This only reinforces my previous questions as to whether S&P has a political agenda in combination with other major players in the financial sector.
Given the failure to bring prosecutions against the bankers and ratings agencies who provided us with toxic derivatives and deadly mortgage fraud as well globally risky trading activities --- all of which were profitable for those financial companies, including the ratings agencies, I am not going to hold my breath that Standard and Poor's will suffer from this allegedly illegal conduct as the financial sector is evidently too important and special to go to jail. Jail is for people who protest social injustice.
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I have been unable to find any other news coverage or discussion of this allegedly illegal conduct except, interestingly enough at Fox News in an article by Charlie Gasparino and a video of Gasparino on Fox News disclosing the leaks by S&P. EconProph is the only other source commenting on this and extensively quoted from Yves Smith's article.
This only reinforces my previous questions as to whether S&P has a political agenda in combination with other major players in the financial sector.
Given the failure to bring prosecutions against the bankers and ratings agencies who provided us with toxic derivatives and deadly mortgage fraud as well globally risky trading activities --- all of which were profitable for those financial companies, including the ratings agencies, I am not going to hold my breath that Standard and Poor's will suffer from this allegedly illegal conduct as the financial sector is evidently too important and special to go to jail. Jail is for people who protest social injustice.
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Who Owns United States Debt?
The Australian economist Bill Mitchell has been following data sets to analyze US debt and who owns it and, as of March 2011, the largest owner of US debt is the US government, which owns 41.7% (including the FED which is not an actual government agency but a private bank authorized by Congress) of its own debt. China is third at 8% behind private domestic owners at 26.9%. He also provides in the link above not only a pie chart, but a succinct macroeconomic explanation of sovereign debt and how it is not like a household (you and me) or a city, county, or other form of regional government (such as the State of Illinois) which are revenue constrained but have a guaranteed revenue stream (unlike you and me) in taxes and fees which make it easier for them to borrow. Since sovereign debt is not the same as household debt macroeconomically, it is very counter intuitive for most people no matter how educated they are. Consequently, there is much useless discussion in public debate from individuals on both sides of the political abyss who do not understand what they are talking about.
Mitchell also has come unrelated comments at the end on the UK social unrest including the belief that it would be possible to forecast social unrest by mapping the failure of governments to provide services, good education, and jobs.
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Mitchell also has come unrelated comments at the end on the UK social unrest including the belief that it would be possible to forecast social unrest by mapping the failure of governments to provide services, good education, and jobs.
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Large UP and Down Market Days Since 1950
Calculated Risk has published two tables showing the largest one day percentage market declines and one day percentage market increases and what the market looked like six months later. If you are a believer in perspective and appreciate historical data you need to study those tables at Calculated Risk in the links above. They will not tell you what the market will look like six months from now, but if you use the information and keep your eyes on growth in the United States and globally, you will have a better concept on how growth or the lack of growth will affect the market long term and on day to day news and economic data releases and periodic scheduled reports.
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FOMC and the Thundering Herd
Since this last weekend, I have been privately commenting that the Tuesday meeting of the Federal Reserve Open Market Committee (FOMC) would little to say other than they were continuing to watch and are prepared to act. There have been no significant changes in liquidity needs. There is no need to buy US Treasuries with short tern yields negative as investors pay for safety. They cannot do anything to create jobs as that is primarily a fiscal policy issue and the failure of Congress and the President. I also said the announcement on Tuesday was likely to affect the market and, if I was the FED, I would make the usually very carefully worded announcement after the market closed to give the market overnight to digest it, because there is nothing more stupid than cows in a nervous herd.
The FED statement was as expected, although longer than usual, with an extension of low interest rates into 2013, no changes in policy, and a change in language acknowledging slower recovery (growth) over coming quarters than previously estimated. These were obvious and to be expected, although three members wanted to essentially keep prior statement language. The FED made this at 2:15 eastern time during the market, which almost immediately swung down from positive action as the cows failed to stop and think --- and the herd took off in a storm of fear.
The Tuesday market was volatile the whole day going up and down and up, which is not a good indicator of future market action. The market ended up 429 points at the end, as some of the cows woke up after the cowboys started buying and the realization that the FED was only stating the obvious about the reality of slowing (a soft word for declining) growth.
The economy has an increasing amount of uncertainty in it to the point that statements of truth are disruptive. Rather than deny truth and reality, we need to increase certainty and growth by creating jobs which provide the confidence for people and corporations to buy. Creating jobs requires increased sales in the private sector and spending in the public sector to directly provide job creation and sales.
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The FED statement was as expected, although longer than usual, with an extension of low interest rates into 2013, no changes in policy, and a change in language acknowledging slower recovery (growth) over coming quarters than previously estimated. These were obvious and to be expected, although three members wanted to essentially keep prior statement language. The FED made this at 2:15 eastern time during the market, which almost immediately swung down from positive action as the cows failed to stop and think --- and the herd took off in a storm of fear.
The Tuesday market was volatile the whole day going up and down and up, which is not a good indicator of future market action. The market ended up 429 points at the end, as some of the cows woke up after the cowboys started buying and the realization that the FED was only stating the obvious about the reality of slowing (a soft word for declining) growth.
The economy has an increasing amount of uncertainty in it to the point that statements of truth are disruptive. Rather than deny truth and reality, we need to increase certainty and growth by creating jobs which provide the confidence for people and corporations to buy. Creating jobs requires increased sales in the private sector and spending in the public sector to directly provide job creation and sales.
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Monday, August 8, 2011
Market Reacting to Declining Growth Not S&P Downgrade
As I have written extensively since August 3rd, the stock market is reacting to the problems and data confirming that the United States, Europe, China, and the Global economy is slowing down significantly. The market is not reacting to the S&P downgrade of United States debt, which was not economically warranted and was based on political perceptions and a corporate agenda.
If the stock market was reacting to debt problems, bond prices would be declining as well as equity prices. That is not happening. Bonds are stronger today while the stock market is showing the weakness of being overvalued in a global and national economy of declining growth. We have warned readers, newsletter recipients, and clients about the overvalued market and growth problems for an extended period of time.
Those who have not planned for investment growth consistent with risk tolerance, age, and quality of life needs with an individualized defensive growth diversification and limited losses on ETFs and stocks did not listen to me or did not take my advice.
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If the stock market was reacting to debt problems, bond prices would be declining as well as equity prices. That is not happening. Bonds are stronger today while the stock market is showing the weakness of being overvalued in a global and national economy of declining growth. We have warned readers, newsletter recipients, and clients about the overvalued market and growth problems for an extended period of time.
Those who have not planned for investment growth consistent with risk tolerance, age, and quality of life needs with an individualized defensive growth diversification and limited losses on ETFs and stocks did not listen to me or did not take my advice.
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Sunday, August 7, 2011
Feeds of Blog Posts
Evidently feeds of six blog posts after July, 2011 did not feed. I believe the problem has been corrected and Feedburner indicates a valid update ping.
The six posts were:
S&P's Rating Folly, Part 2: Grading Political Will
Links 8/6/2011:Eyes on Growth
Unemployment - July 2011: Less Workers=Less Unemployed
Links 8/4/2011: Eyes on Growth
Eyes on Growth: Update Links 8/3/2011
Keep Your Eyes on Growth: United States and Global Are Declining Not Slowing
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The six posts were:
S&P's Rating Folly, Part 2: Grading Political Will
Links 8/6/2011:Eyes on Growth
Unemployment - July 2011: Less Workers=Less Unemployed
Links 8/4/2011: Eyes on Growth
Eyes on Growth: Update Links 8/3/2011
Keep Your Eyes on Growth: United States and Global Are Declining Not Slowing
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S&P's Rating Folly, Part 2: Grading Political Will
In April, we thoroughly covered how a threatened S&P downgrade of US debt would be economically meaningless to a sovereign nation with debt issued in its own currency. The April S&P warning fueled the political divisiveness of public debate placing the S&P directly in the political game as a player influencing political debate. Credit ratings agencies are federally licensed and regulated businesses as NRSRO's (Nationally Recognized Statistical Rating Organizations) and they are not lobbyists, although they escaped financial reform after the Global Financial Crisis which they helped precipitate with misleading credit ratings for companies that failed and investments which were actually toxic.
On Friday, S&P downgraded United States debt from AAA to AA+ despite a $2 trillion S&P error in their analysis. Economically, this is meaningless. You only have to look at the low yields on Japanese bonds after losing their triple A credit rating almost ten years ago. Is the S&P engaged in a political agenda contrary to its regulated purpose?
It appears from the S&P report that the primary concern was the lack of political will by elected representatives and officials to come to a reasonable agreement prior to a repetitive political drama over extension of the debt ceiling. The job of the S&P, as a NRSRO, is to provide an independent statistical analysis of financial credit worthiness which can be relied upon by investors and they have not demonstrated any compelling analysis in the report.
Felix Salmon has noted that default is an act of political will not an econometric decision and that "...it’s fair to pin the lion’s share of the blame on the existence of the debt ceiling." The political debate over the debt ceiling was vicious and destructive and exactly why Section 4 of the 14th Amendment to the U.S. Constitution was passed after the Civil War. The debt ceiling law is not only destructively counter productive, it is legally superfluous. Conservative economic commentator, Megan McArdle, went so far in noting the lack of political will in the debt debate and the obvious necessity to increase the debt ceiling that she said, "...I'm afraid I think that the lion's share of the blame goes to the GOP, which escalated to this completely unnecessary showdown, and then gave up any hope of a grand bargain because it would have required some revenue increases." Given that President Obama believes, and has voted in the past to not raise the debt ceiling as a Senator, in deficit reduction and aided and abetted the deficit hawk elements, although he recognized the need for revenue increases, he appears to be getting off light in the lack of political will department, which is unfortunate since he has demonstrated little political will since assuming office.
Did the S&P downgrade United States debt on the lack of political will in the political process in the United States? On page four of the report which is linked above, the S&P states "We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the Act." They are saying the Republicans in Congress lack the political will to to do what is reasonably necessary to govern in a fiscally responsible manner consistent with the economic needs extant. The mainstream media has ignored this sentence in the report, because it exposes the political charade of the debt ceiling debate as economically incompetent wasted demagogic rhetoric on the debt rather than one of governance.
The S&P, however, used these same tactics, in combination with Moody's, in the 1990's in Canada to assist financial interests in slashing unemployment insurance and health care just as they used their power in 2000 to squash mortgage lending reform. As the economist Rajiv Sethi argues, perhaps, it is time that the credit ratings agencies, which were so instrumental in profiting from credit ratings which were so unreliable they directly contributed to the Global Financial Crisis, be stripped of their legally protected status and monopoly power and made to compete on merit of work with full legal fiduciary liability to the investing public in a democratic society. It is coming to a decision point about whether we are a corporatist market state or a republican democracy.
Jesse's Cafe Americain observed that Friday's market showed visible signs of movement of knowledge of a hidden agenda with respect to the expected S&P announcement, as Felix Salmon and Megan McArdle also mentioned, and concludes that the class war will only intensify now as governance is being cast aside.
Futures at this point in time are mixed with the DOW positive and the Nasdaq and S&P 500 negative. The German Dax futures are negative. The Middle East stock markets on Sunday were down with the Israeli stock market down 6.99% (TA-25), supposedly as a reaction to the US downgrade. Any down movement on Monday solely attributed to this downgrade would be foolish herd behavior and soon recognized as such. However, the eurozone meeting of Central bankers is this Sunday night and the professional market will be watching what the ECB does on Monday. Here are the economic reports, including retail, household debt, and FOMC meeting (which is expected to result in the FED saying they are watching and waiting), which will come out this week and could potentially impact the market.
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On Friday, S&P downgraded United States debt from AAA to AA+ despite a $2 trillion S&P error in their analysis. Economically, this is meaningless. You only have to look at the low yields on Japanese bonds after losing their triple A credit rating almost ten years ago. Is the S&P engaged in a political agenda contrary to its regulated purpose?
It appears from the S&P report that the primary concern was the lack of political will by elected representatives and officials to come to a reasonable agreement prior to a repetitive political drama over extension of the debt ceiling. The job of the S&P, as a NRSRO, is to provide an independent statistical analysis of financial credit worthiness which can be relied upon by investors and they have not demonstrated any compelling analysis in the report.
Felix Salmon has noted that default is an act of political will not an econometric decision and that "...it’s fair to pin the lion’s share of the blame on the existence of the debt ceiling." The political debate over the debt ceiling was vicious and destructive and exactly why Section 4 of the 14th Amendment to the U.S. Constitution was passed after the Civil War. The debt ceiling law is not only destructively counter productive, it is legally superfluous. Conservative economic commentator, Megan McArdle, went so far in noting the lack of political will in the debt debate and the obvious necessity to increase the debt ceiling that she said, "...I'm afraid I think that the lion's share of the blame goes to the GOP, which escalated to this completely unnecessary showdown, and then gave up any hope of a grand bargain because it would have required some revenue increases." Given that President Obama believes, and has voted in the past to not raise the debt ceiling as a Senator, in deficit reduction and aided and abetted the deficit hawk elements, although he recognized the need for revenue increases, he appears to be getting off light in the lack of political will department, which is unfortunate since he has demonstrated little political will since assuming office.
Did the S&P downgrade United States debt on the lack of political will in the political process in the United States? On page four of the report which is linked above, the S&P states "We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues, a position we believe Congress reinforced by passing the Act." They are saying the Republicans in Congress lack the political will to to do what is reasonably necessary to govern in a fiscally responsible manner consistent with the economic needs extant. The mainstream media has ignored this sentence in the report, because it exposes the political charade of the debt ceiling debate as economically incompetent wasted demagogic rhetoric on the debt rather than one of governance.
The S&P, however, used these same tactics, in combination with Moody's, in the 1990's in Canada to assist financial interests in slashing unemployment insurance and health care just as they used their power in 2000 to squash mortgage lending reform. As the economist Rajiv Sethi argues, perhaps, it is time that the credit ratings agencies, which were so instrumental in profiting from credit ratings which were so unreliable they directly contributed to the Global Financial Crisis, be stripped of their legally protected status and monopoly power and made to compete on merit of work with full legal fiduciary liability to the investing public in a democratic society. It is coming to a decision point about whether we are a corporatist market state or a republican democracy.
Jesse's Cafe Americain observed that Friday's market showed visible signs of movement of knowledge of a hidden agenda with respect to the expected S&P announcement, as Felix Salmon and Megan McArdle also mentioned, and concludes that the class war will only intensify now as governance is being cast aside.
Futures at this point in time are mixed with the DOW positive and the Nasdaq and S&P 500 negative. The German Dax futures are negative. The Middle East stock markets on Sunday were down with the Israeli stock market down 6.99% (TA-25), supposedly as a reaction to the US downgrade. Any down movement on Monday solely attributed to this downgrade would be foolish herd behavior and soon recognized as such. However, the eurozone meeting of Central bankers is this Sunday night and the professional market will be watching what the ECB does on Monday. Here are the economic reports, including retail, household debt, and FOMC meeting (which is expected to result in the FED saying they are watching and waiting), which will come out this week and could potentially impact the market.
Print Page
Saturday, August 6, 2011
Links 8/6/2011: Eyes on Growth
US employment saw a modest monthly increase which should only take a little over 74 years to get unemployment down to 5%. Basically, the July report showed a decline in the working population which is translating itself into a decline in unemployment.
The employment report
Part time workers and duration of unemployment
Employment to population ratio has fallen to 1953 levels
as jobless benefits end, recession looms
still mystified over unemployment (Menzie Chinn)
study: unions decline increases wage inequality
Jobs report means FED will announce next week they will think about it for awhile (Tim Duy)
Inflation, what US inflation?(Paul Krugman)
Study: tax flight by businesses is a myth
James Galbraith on why economist's will not discuss fraud in financial sector
another explanation of why debt-to-GDP ratio is mathematically incorrect
Unofficial US problem bank list down to 988 banks
The Bank of America deathwatch
Bank of America has no clue what its mortgage losses will be
RBS losses on Greek writedowns
How different European banks treat Greek bonds
Dexia losses most in history
Balanced budget amendment in US would defeat economic purpose of government (Simon Johnson)
Austerity defeats the purpose of government which is to serve the people (Bill Mitchell)
Top ten misconceptions of eurozone crisis (take this with a critical grain of salt -- some people do not have the courage to default correctly if they prefer to be indentured servants for generations)
The contagion of bad ideas (austerity & protecting financial companies rather than citizens) since the Global Financial Crisis is destructive of economic fundamentals (Joseph Stiglitz)
Is the eurozone lost in the depth of structural reforms and the growth destruction of austerity (apply critical analysis to this piece) (Daniel Gros)
Will wage cuts with debt reduction decrease prices and make Greece more competitive in time to survive? Oh! the pain, the pain!
the liquidity problems of the eurozone without a central bank acting as lender of last resort = inevitable failure (Edward Harrison)
The argument for eurobonds issued by ECB, which has no authority to issue bonds (Yanis Varoufakis): why is the EIB not being considered as Rob Parenteau has suggested? Is it because the EIB is an investment bank run by investment bankers who do not understand a societal role?
Germany is in denial that it is a member of a monetary union
Meanwhile, Ireland tries to manipulate the price of distressed property owned by NAMA
The FED and the ECB are both behind the learning curve of debt deflation (Tim Duy)
Italian and Spanish growth slow as austerity pinches
sluggish growth threatens recovery
Why Italy? Why Spain? The EFSF will fail as long as the toxic debt-to-GDP ratio lives in its heart (Yanis Varoufakis)
Portugal's austerity fails to reduce bond yields (does the market understand it is hard to make interest payments if growth is impaired by austerity?)
Europe's plan will not cut Greek debt
Austerity and public safety in Athens
Spain cancels August 18th bond auction
Greece cannot recover on innovation because research, education, and innovation require spending
The Parade of the EU and ECB in the celebration of a Failure of Political Will as demonstrated this past week:
Trichet's purchase of Portuguese and Irish bonds fails to help Italy and Spain
ECB's shock-and-awe wimps into whimper
temporarily throws Italy and Spain to the wolves
the international markets react impatiently
Barroso constructively suggests reconsideration of EFSF and receives anger in return
Italy must cut services to people as condition for ECB to help
Italy will accelerate austerity and balance budget in 2013 (want to bet on the plunge in growth into recession?) to get ECB help
ECB agrees to buy Italian and Spanish bonds next Monday
Economically knowledgeable people internationally have been urging to buy Spanish and Italian bonds to constrain the market and provide support to their ability to make their debt payments in the future since they have no ability to exercise the normal sovereign nation's escape valves through fiat currency depreciation, because they use a foreign currency (euro) of a monetary union with no fiscal transfer mechanism to correct current account imbalances resulting from trade lack of competitiveness within in a currency union.
But these very same economically knowledgeable people also know this is only a very necessary stop gap and very temporary if the eurozone will not start acting as if all of its citizens are members of a single union:
We have seen this before (Cullen Roche).
It is incredibly difficult to stabilize finances in a debt-deflation spiral (Tim Duy) if they cannot print their own currencies.
S&P downgrades United States to from AAA to AA+ despite $2 trillion S&P error is their analysis. Economically, this is meaningless. You only have to look at the low yields on Japanese bonds after losing their triple A credit rating almost ten years ago. Is the S&P engaged in a political agenda contrary to its regulatory constraints?
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The employment report
Part time workers and duration of unemployment
Employment to population ratio has fallen to 1953 levels
as jobless benefits end, recession looms
still mystified over unemployment (Menzie Chinn)
study: unions decline increases wage inequality
Jobs report means FED will announce next week they will think about it for awhile (Tim Duy)
Inflation, what US inflation?(Paul Krugman)
Study: tax flight by businesses is a myth
James Galbraith on why economist's will not discuss fraud in financial sector
another explanation of why debt-to-GDP ratio is mathematically incorrect
Unofficial US problem bank list down to 988 banks
The Bank of America deathwatch
Bank of America has no clue what its mortgage losses will be
RBS losses on Greek writedowns
How different European banks treat Greek bonds
Dexia losses most in history
Balanced budget amendment in US would defeat economic purpose of government (Simon Johnson)
Austerity defeats the purpose of government which is to serve the people (Bill Mitchell)
Top ten misconceptions of eurozone crisis (take this with a critical grain of salt -- some people do not have the courage to default correctly if they prefer to be indentured servants for generations)
The contagion of bad ideas (austerity & protecting financial companies rather than citizens) since the Global Financial Crisis is destructive of economic fundamentals (Joseph Stiglitz)
Is the eurozone lost in the depth of structural reforms and the growth destruction of austerity (apply critical analysis to this piece) (Daniel Gros)
Will wage cuts with debt reduction decrease prices and make Greece more competitive in time to survive? Oh! the pain, the pain!
the liquidity problems of the eurozone without a central bank acting as lender of last resort = inevitable failure (Edward Harrison)
The argument for eurobonds issued by ECB, which has no authority to issue bonds (Yanis Varoufakis): why is the EIB not being considered as Rob Parenteau has suggested? Is it because the EIB is an investment bank run by investment bankers who do not understand a societal role?
Germany is in denial that it is a member of a monetary union
Meanwhile, Ireland tries to manipulate the price of distressed property owned by NAMA
The FED and the ECB are both behind the learning curve of debt deflation (Tim Duy)
Italian and Spanish growth slow as austerity pinches
sluggish growth threatens recovery
Why Italy? Why Spain? The EFSF will fail as long as the toxic debt-to-GDP ratio lives in its heart (Yanis Varoufakis)
Portugal's austerity fails to reduce bond yields (does the market understand it is hard to make interest payments if growth is impaired by austerity?)
Europe's plan will not cut Greek debt
Austerity and public safety in Athens
Spain cancels August 18th bond auction
Greece cannot recover on innovation because research, education, and innovation require spending
The Parade of the EU and ECB in the celebration of a Failure of Political Will as demonstrated this past week:
Trichet's purchase of Portuguese and Irish bonds fails to help Italy and Spain
ECB's shock-and-awe wimps into whimper
temporarily throws Italy and Spain to the wolves
the international markets react impatiently
Barroso constructively suggests reconsideration of EFSF and receives anger in return
Italy must cut services to people as condition for ECB to help
Italy will accelerate austerity and balance budget in 2013 (want to bet on the plunge in growth into recession?) to get ECB help
ECB agrees to buy Italian and Spanish bonds next Monday
Economically knowledgeable people internationally have been urging to buy Spanish and Italian bonds to constrain the market and provide support to their ability to make their debt payments in the future since they have no ability to exercise the normal sovereign nation's escape valves through fiat currency depreciation, because they use a foreign currency (euro) of a monetary union with no fiscal transfer mechanism to correct current account imbalances resulting from trade lack of competitiveness within in a currency union.
But these very same economically knowledgeable people also know this is only a very necessary stop gap and very temporary if the eurozone will not start acting as if all of its citizens are members of a single union:
We have seen this before (Cullen Roche).
It is incredibly difficult to stabilize finances in a debt-deflation spiral (Tim Duy) if they cannot print their own currencies.
S&P downgrades United States to from AAA to AA+ despite $2 trillion S&P error is their analysis. Economically, this is meaningless. You only have to look at the low yields on Japanese bonds after losing their triple A credit rating almost ten years ago. Is the S&P engaged in a political agenda contrary to its regulatory constraints?
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