DO BOND MARKETS FUND OUR SPENDING?
by ilene - August 27th, 2010 1:41 pm
DO BOND MARKETS FUND OUR SPENDING?
Courtesy of The Pragmatic Capitalist
This idea that the United States is the next Greece persists. We saw it several times this week from various analysts and the regular pundits who continue to trot out this argument despite having been terribly wrong about their hyperinflation and/or default thesis over the last few years. I think it’s very important that investors understand that the United States cannot default on its obligations in the same way that Greece, a US state or a household can. Why is it important to understand this? Because markets are psychologically driven. Regular readers know I am not the most optimistic prognosticator. Anyone who has read this site over the last few years knows that I have and continue to believe we are mired in a balance sheet recession. My outlook is not rosey, but it is not dire either. I do not believe doom is on the horizon and I most certainly do not believe the United States, as the sovereign supplier of a non-convertible floating exchange rate currency, will default on its obligations.
At the center of this argument is the actual workings of our monetary system. So, how does the United States actually fund itself? Unlike a household, the United States does not require revenue or debt to fund itself. The United States government simply credits bank accounts. They walk into a room and input numbers into computers – literally. This might sound counter-intuitive to the rest of us who fund our spending through debt issuance or revenue streams, but the same is not true for the Federal Government. This was best explained last week in an interview on BNN by Marshall Auerback, a portfolio strategist with RAB Capital:
“Governments spend by crediting bank accounts. The causation is that you spend money first. What happens afterwards is bonds are issued as a reserve drain. They don’t actually fund anything. This is one of the great myths that is perpetuated by most of the economics profession. So the idea that we have “unfunded liabilities” is ludicrous. If we declare a war, for example, in Iraq or Afghanistan, we don’t go to our bond holders. We don’t go to China to give them a line-item veto for what we can and can’t spend. We just spend the money. The implicit assumption here is that somehow we have some external constraint. The
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Digg“Contained Depression”
by ilene - August 25th, 2010 3:28 pm
"Contained Depression"
Courtesy of Mish
Kevin Feltes, an economist for the Jerome Levy Forecasting Center, solicited my opinion on a couple of their recent articles.
Levy comes down on the side of deflation, as do I. However, the devil is in the details, as always. I will go through one of their articles in a point-by-point fashion, stating where I agree and disagree with their analysis.
This is a long post. Please give it some time.
Please consider Widespread Fear of the Wrong Kind of Price Instability.
Levy:
It is not inflation but more disinflation and ultimately deflation that lie ahead in the 2010s.
Inflation worries remain a major part of the market backdrop, and the past year has brought new price stability concerns to investors. During that time, we have written about inflation fears, deflation risks, and the relationships between price trends and monetary policy, fiscal policy, Treasury debt levels, foreign debt holdings, and various other issues. We have argued that rising inflation will not be a threat in the coming years and that disinflation and some deflation are the real worries. Our position remains unchanged.
1. Why It Will Be Very Difficult for Inflation to Accelerate in the Next Few Years
The dominant influence on price trends in the near future and for years to come will be the deflationary influence of chronically high unemployment. The economy not only has gone through a deep recession but also has entered a contained depression, a long period of substandard economic performance, chronic financial problems, and generally high unemployment. The contained depression is likely to last about a decade; it will end in the latter half of the 2010s at the earliest and could stretch into the 2020s
In the years ahead, chronic high unemployment will weigh heavily on labor costs; chronic economic weakness will tend to keep profit margins under pressure and firms focused on cost control; and global instability and large areas of depression (contained or otherwise) will reduce upward pressures on prices of imported commodities and are likely to cause these prices to fall much of the time.
Even if imported commodity prices, most notably oil prices, rise sharply at times, they will not have a large, lasting effect on inflation as long as labor costs are decelerating or actually falling.
Labor costs are the dominant inflation influence not only because
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17 REASONS TO BE BULLISH
by ilene - July 24th, 2010 9:55 pm
David Rosenberg (the bear) takes a walk on the bullish side and here’s what he finds to be optimistic about. – Ilene
17 REASONS TO BE BULLISH
Courtesy of The Pragmatic Capitalist
Regular readers know I tend to focus on the negative aspects of the markets as opposed to the positives – anyone could put on a smile and skip through oncoming traffic, but the truth is, the investment world can be a very dangerous place so skipping along as if there are no risks involved is beyond foolish. But ignoring the positives is equally foolish. In this world of heightened market risks and particularly clear uncertainty here are 17 reasons to consider the bullish case (via David Rosenberg at Gluskin Sheff):
- Congress extending jobless benefits (yet again).
- Polls showing the GoP can take the House and the Senate in November.
- Some Democrats now want the tax hikes for 2011 to be delayed.
- Cap and trade is dead.
- Cameron’s popularity in the U.K. and market reaction there is setting an example for others regarding budgetary reform.
- China’s success in curbing its property bubble without bursting it.
- Growing confidence that the emerging markets, especially in Asia and Latin America, will be able to ‘decouple’ this time around. We heard this from more than just one CEO on our recent trip to NYC and Asian thumbprints were all over the positive news these past few weeks out of the likes of FedEx and UPS.
- Renewed stability in Eurozone debt and money markets – including successful bond auctions amongst the Club Med members.
- Clarity with respect to European bank vulnerability.
- Signs that consumer credit delinquency rates in the U.S. are rolling over.
- Mortgage delinquencies down five quarters in a row in California to a three-year low.
- The BP oil spill moving off the front pages.
- The financial regulation bill behind us and Goldman deciding to settle –more uncertainty out of the way.
- Widespread refutation of the ECRI as a leading indicator … even among the architects of the index! There is tremendous conviction now that a double-dip will be averted, even though 85% of the data releases in the past month have come in below expectations.
- Earnings
season living up to expectations, especially among some key large-caps in the tech/industrial space – Microsoft, AT&T, CAT, and 3M are being viewed as game changers (especially 3M’s upped guidance).
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Bernanke Says Economic Outlook is “Unusually Uncertain”, Fed Prepared for “Actions as Needed”
by ilene - July 21st, 2010 5:32 pm
Bernanke Says Economic Outlook is "Unusually Uncertain", Fed Prepared for "Actions as Needed"
Courtesy of Mish
Be prepared for Quantitative Easing Round 2 (QE2) and/or other misguided Fed policy decisions because Bernanke Says Fed Ready to Take Action.
Treasuries rose, pushing two-year yields to the fourth record low in five days, as Federal Reserve Chairman Ben S. Bernanke said the economic outlook is “unusually uncertain” and policy makers are prepared “to take further policy actions as needed.”
Ten-year note yields touched a three-week low as Bernanke said central bankers are ready to act to aid growth even as they prepare to eventually raise interest rates from almost zero and shrink a record balance sheet.
“An unusual outlook may call for unusual measures, and that means the Fed may take more action as needed, which would lead to lower rates,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas, one of the 18 primary dealers that trade with the central bank.
The Fed chief didn’t elaborate on steps the Fed might take as he affirmed the Fed’s policy of keeping rates low for an “extended period.” Economic data over the past month that were weaker than analysts projected have prompted investor speculation the Fed may increase monetary stimulus in a bid to keep the economy growing and reduce a jobless rate from close to a 26-year high.
“Bernanke acknowledged that things weren’t very strong economically and left action on the table without going into details, and that’s sending investors from stocks into bonds,” said James Combias, New York-based head of Treasury trading at primary dealer Mizuho Financial Group Inc.
Monetary Policy Report to the Congress July 2010
Inquiring minds are slogging through the 56 page Monetary Policy Report to the Congress July 2010. Here are a few key snips.
Summary of Economic Projections
Participants generally made modest downward revisions to their projections for real GDP growth for the years 2010 to 2012, as well as modest upward revisions to their projections for the unemployment rate for the same period.
Participants also revised down a little their projections for inflation over the forecast period. Several participants noted that these revisions were largely the result of the incoming economic data and the anticipated effects of developments abroad on U.S. financial markets and the economy. Overall, participants continued to expect the pace of the economic recovery to
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Bernanke Reiterates the Fed’s “Whatever It Takes” Pledge for the Thousandth Time
by ilene - July 21st, 2010 5:27 pm
To summarize and save you time, Jr. Deputy Accountant writes:
Bernanke Reiterates the Fed’s "Whatever It Takes" Pledge for the Thousandth Time
I won’t call Bernanke a one trick pony since he’s got more tricks than a Hollywood madam but I will say this: the man is nothing if not consistent.
Federal Reserve Chairman Ben Bernanke told Congress Wednesday the economic outlook remains "unusually uncertain," and the central bank is ready to take new steps to keep the recovery alive if the economy worsens.
Testifying before the Senate Banking Committee, Bernanke also said record low interest rates are still needed to bolster the U.S. economy. He repeated a pledge to keep them there for an "extended period."
Whatever it takes!
Full text of Bernanke’s semi-annual monetary policy check-in with Congress may be found via the Board of Governors.
Jim Grant on the New Federal Reserve Governor Nominees; Economic Groupthink
by ilene - July 21st, 2010 12:57 am
(Video’s back in working order.)
Jim Grant on the New Federal Reserve Governor Nominees; Economic Groupthink
Courtesy of JESSE’S CAFÉ AMÉRICAIN
Organizations, whether it be a club or a profession or a department, too often over time develop a sort of intellectual inertia, a bureaucratic mindset that tends to perpetuate and validate a certain view of the world amongst its members, particularly if they share other elements in background and world view.
This works to its advantage when they are right, and when the scope of the tasks which they must address are limited to largely operational concerns, without significant risk in the classic sense of the term.
But when the situation becomes different, the environment changes, this organizational mindset not only stifles innovation and adaptation, it can literally reach out and strangle it, well beyond its members, using the entrenched power of its tenure. We see this tendency clearly in organizations that have enjoyed long periods of organizational growth under the leadership of strong personalities, such as the FBI under Hoover, and the Federal Reserve under Greenspan.
We can see this same tendency on a micro level in our daily life on chatboards, in clubs, in our company departments, in civic organizations. It is a tribalistic instinct, that urges the adoption of a consensus view, often influenced and promoted by articulate and single minded individuals, which then musters and focuses the energy and vitality of the group in the execution of its mission.
When it is right, it brings success. But when it goes wrong, when it feeds on itself, becomes defensive and inwardly focused, when perpetuation of the group view overtakes all other considerations, when tribal loyalty and sameness is valued over results, it leads to a cult like behaviour, inbred thinking, that may be inimical to the best intentions of the group, and the sort of behavioural anomalies which we have seen in the tragedies of Watergate, the latter stage Hoover FBI, and even Jonestown.
Economics is in the grips of such a period in its development. One of the primary causes of this problem has been the rise of a few well funded think tanks, universities, and of course the Federal Reserve, that have become powerful influencers, and guardians, dogmatisers of the status quo. The petty sniping among the schools notwithstanding, the current debate of stimulus versus austerity serves to show how anemic, how self…
Kansas City Fed’s Hoenig: Monetary Policy Should Remain on Hold
by ilene - July 15th, 2010 6:09 pm
Kansas City Fed’s Hoenig: Monetary Policy Should Remain on Hold
Courtesy of Jr. Deputy Accountant
By "on hold" he means don’t buy any more crap assets, you asshats. I could be wrong on that interpretation but I’m pretty sure I’m up on my Fedspeak these days.
MW:
The Federal Reserve should resist the temptation to take more easing steps despite growing concerns in some quarters of a slowdown, said Thomas Hoenig, the president of the Kansas City Federal Reserve Bank on Wednesday. "I feel that monetary policy should remain on hold," Hoenig said in an interview on the CNBC cable television channel. The Kansas City Fed president said some weak data had not shaken his basic forecast of a modest recovery this year.
In case you don’t already know, Hoenig is the FOMC’s resident cockblocker and has dissented every month for the year. Unlike our buddy Janet Yellen who prefers the yes method.
The ECB Blasts Governmental Fear-Based Racketeering, Questions Keynesianism, Believes The Fed’s Powers Are Overestimated
by ilene - May 29th, 2010 4:58 pm
The ECB Blasts Governmental Fear-Based Racketeering, Questions Keynesianism, Believes The Fed’s Powers Are Overestimated
Courtesy of Tyler Durden at Zero Hedge
In what could one day be seen by historians as a seminal speech presented before the Paul Volcker-chaired Group of Thirty’s 63rd Plenary Session in Rabat, the ECB’s Lorenzo Bini Smaghi had two messages: a prosaic, and very much expected one: of unity and cohesion, if at least in perception if not in deed, as well as an extremely unexpected one, in which the first notable discords at the very peak of the power echelons, are finally starting to leak into the public domain. It is in the latter part that Bini Smaghi takes on a very aggressive stance against not only the so-called "inflation tax", or the purported ability of central bankers to inflate their way out of any problem, but also slams the recently prevalent phenomenon of fear-mongering by the banking and political elite, which has become the goto strategy over the past two years whenever the banking class has needed to pass a policy over popular discontent. The ECB member takes a direct stab at the Fed’s perceived monetary policy inflexibility and US fiscal imprudence, and implicitly observes that while the market is focusing on Europe due to its monetary policy quandary, it should be far more obsessed with the US. Bini Smaghi also fires a warning shot that ongoing divergence between the ECB and Germany will not be tolerated. Most notably, a member of a central bank makes it very clear that he is no longer a devout believer in that fundamental, and false, central banking religion – Keynesianism.
First, a quick read through the "prosaic" sections of Bini Smaghi’s letter.
Bini Smaghi, who is a member of the executive board of the ECB, has a primary obligation to defend the ECB’s public image in this time of weakness and complete lack of credibility. And so he does. When discussing the ECB’s response to the Greek fiasco and contagion, he is steadfast that the response, although delayed and volatile, was the right one. Furthermore, he claims that the hard path Europe has set on is the right one, as it will ultimately right all the fiscal wrongs, even without the benefit of individual monetary intervention. Ultimately, the ECB is convinced that not letting Greece fail, either in the…
“Audit the Fed” Dies But Doesn’t Really Die
by ilene - May 7th, 2010 6:30 pm
"Audit the Fed" Dies But Doesn’t Really Die
Courtesy of Jr. Deputy Accountant
After much lip-flapping over the dangers of exposing the Fed’s top secret monetary policy thought process to ignorant outsiders, opponents of a full Fed audit have gotten their wish and killed Audit the Fed as we knew it.
Don’t worry, it’s not quite dead.
Plan for Congressional Audits of Fed Dies in Senate (WSJ):
Last-minute maneuvering in the Senate allowed the Federal Reserve to sidestep legislation that would have exposed its interest-rate decision-making to congressional auditors.
Pressure from the Obama administration led Senate lawmakers to alter a provision pushed by Sen. Bernie Sanders (I., Vt.) that was gaining momentum despite opposition from the Treasury and the Fed. It would have largely repealed a 32-year-old law that shields Fed monetary policy from congressional auditors.
The compromise, endorsed by Senate Banking Committee Chairman Christopher Dodd (D., Conn.) and the Treasury, would require the Fed to disclose more details about its lending during the financial crisis. It would also require a one-time audit of those loans and a one-time review of Fed governance. A formal vote was pushed back until next week.
Thursday’s Senate showdown came after senators on the left and right joined forces to support Mr. Sanders’ provision.
"At a time when our entire financial system almost collapsed, we cannot let the Fed operate in secrecy any longer," Mr. Sanders said. "The American people have a right to know."
But Fed Chairman Ben Bernanke, while insisting on a commitment to "openness" at the Fed, said in a letter to Congress the Sanders measure would "seriously threaten monetary policy independence, increase inflation fears and market interest rates, and damage economic stability and job creation."
Gee, would Bernanke feel seriously threatened because he is smart enough to know that if we were to crack open his secret diary we’d discover that it’s been HIM stoking inflation and manipulating interest rates?
Anyway, we’ll never get to crack into monetary policy (just a guess) but that’s probably for the best; the more we pick at the Fed, the more we expose their weaknesses to foreign governments or central banks who might like to manipulate the precarious position our own central bank is in. It’s a strategic move, and those sorts of moves (some of …
Fed Privately Lobbies Senate to Kill Audit; What You Can Do!
by ilene - May 4th, 2010 2:46 pm
Fed Privately Lobbies Senate to Kill Audit; What You Can Do!
Courtesy of Mish
A bill sponsored by Ron Paul and Alan Grayson to thoroughly audit the Fed, passed the House. However in a brazen move that ought to offend the sensibilities of every citizen, the Fed is lobbying Senate members to water down the bill so that it is meaningless.
The Huffington Post tells the story in Fed Privately Lobbying Against Audit.
The Federal Reserve is privately lobbying against a bipartisan Senate amendment that would open the central bank to an audit by the Government Accountability Office, according to documents distributed to Senate offices by a Fed official.
In order to obtain the documents, HuffPost agreed not to reveal the name of the Federal Reserve official who did the specific lobbying in question.
"As I mentioned, we believe that the bipartisan Corker-Merkley provision in the Dodd Bill is quite strong and addresses issues of transparency and disclosure without impinging on the independence of monetary policy," the official goes on.
Merkley teamed with Sen. Bob Corker (R-Tenn.) on an audit provision, but Merkley himself says he’d prefer to go further. "I appreciate Representative [Alan] Grayson’s concerns over accountability at the Federal Reserve. I have been a strong proponent of Fed reform and voted against the re-confirmation of Ben Bernanke because the Fed has been so lax in using its regulatory powers," Merkley said in a statement to HuffPost, responding to an analysis from Rep. Alan Grayson (D-Fla.) showing that the Senate bill did not meaningfully expand transparency.
The Fed argument is a replay of a tactic that the bank tried in the House. Instead of outright opposition, the Fed backed an amendment in the lower chamber from Rep. Mel Watt (D-N.C.), which the bank said would expand transparency but not interfere with monetary policy. It became clear, however, that the amendment would not expand transparency and was an attempt to defeat the audit in general. The Watt amendment was soundly defeated.
The Corker-Merkley amendment is the Senate version of the Watt amendment and the Fed is once again arguing that the broader amendment will impinge on the independence of monetary policy.
"The Sanders amendment, however, would directly interfere with monetary policy," argues the Fed official. "The amendment removes the current statutory protection for core monetary policy activities from GAO audit and would permit the GAO to
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(