Mish's Global Economic Trend Analysis

Global Competitive Debasement; Currency Wars Begin; Message of Gold

Posted: 05 Oct 2010 04:37 PM PDT

The Bank of Japan is leading the way to new measures of stimulus insanity with a plan to buy a wide variety of assets including real estate investment trusts (REITs) and asset backed commercial paper (ABCP).

Please consider Factbox: BOJ to set up fund to buy JGBs, corporate debt

The Bank of Japan on Tuesday decided to set up, as a temporary measure, a 5 trillion yen ($59.9 billion) pool of funds to buy assets ranging from government bonds to corporate bonds.

Following are key points about the new measure:

-- The programme will consist of a fund totaling 5 trillion yen to buy assets anew as well as the existing 30-trillion-yen fixed-rate fund-supply tool that will hold designated assets as collateral.

-- The programme is a temporary measure aimed at encouraging declines in long-term interest rates and risk premiums.

-- The fund is designed to cover Japanese government bonds, treasury bills, commercial paper (CP), asset-backed commercial paper (ABCP), corporate bonds, exchange-traded funds (ETFs) and Japanese real estate investment trusts (J-REITs).

-- The BOJ will not apply its self-imposed ceiling on its outright JGB buying to the JGBs to be purchased with the new fund.

-- The BOJ will aim to bring the balance of assets purchased using the new fund to 5 trillion yen in one year, with about 3.5 trillion yen assigned for JGBs and treasury bills and about one trillion yen for CP, ABCP and corporate bonds.

What About Paintings and Shellfish?

Why not paintings, equities, and shellfish? Given enough time, perhaps it comes to that.

Meanwhile, I am pleased to report that the global recovery has gained so much traction that numerous countries feel obliged to join the US/Japan sponsored stimulus party.

Global Competitive Debasement

Bloomberg reports BOJ May Have Acted First in Renewed Round of Action

The unexpected decision by the Japanese central bank yesterday to drop its interest rate to "virtually zero" and expand its balance sheet follows the U.S. Federal Reserve's move toward more unconventional easing. Bank of England officials will consider further stimulus tomorrow, while the central banks of Australia, Canada and New Zealand are among those now holding fire on further interest-rate increases.

The renewed push for easier monetary policy comes as the International Monetary Fund warns growth in advanced economies is falling short of its forecasts ahead of its annual meetings in Washington this week. The dilemma for policy makers is that their actions may do little to revive growth and end up roiling currency markets.

Bank of Japan Governor Masaaki Shirakawa may not be alone for long in taking action and Daiwa Institute of Research argues he's now engaged in a "vicious spiral" of monetary easing with the Fed as both compete to bolster their economies.

"The irony is that the Fed is creating all this liquidity with the hope that it will revive the U.S. economy. It is doing nothing for the U.S. economy and causing chaos for the rest of the world," Joseph Stiglitz, a Nobel Prize-winning professor at New York's Columbia University, said today in New York.

The ECB will be forced to postpone tighter policy as European exports fade and investors continue to fret about peripheral euro-area economies such as Portugal and Ireland, said Silvio Peruzzo, an economist at Royal Bank of Scotland Group Inc. in London.

"The ECB's exit strategy is fully on, but the business cycle will turn against them," said Peruzzo. "The communication will then be adjusted to consider downside risks greater than what they have anticipated."

The ECB last week stepped up its government bond purchases as the cost of insuring against default on Portuguese government debt surged to a record and Irish bond spreads soared to euro- era highs.

Another risk is that the use of unconventional monetary policy is viewed as an effort to weaken currencies to boost exports, rising competitive devaluations and protectionist responses, said Eric Chaney, chief economist at AXA Group in Paris. Japan, Switzerland and Brazil are among the countries that have already intervened in markets to restrain their exchange rates.

"This is close to a currency war," said Chaney, a former official at the French France Ministry. "It's not through exchange-rate manipulation, but through monetary policies."

Currency Wars

This is not "close to a currency war" this IS a currency war.

While I have had numerous differences of opinion with Joseph Stiglitz, he is absolutely correct when he says "The irony is that the Fed is creating all this liquidity with the hope that it will revive the U.S. economy. It is doing nothing for the U.S. economy and causing chaos for the rest of the world."

Moreover what Stiglitz says about Bernanke and the Fed, applies equally to the Bank of England, the Bank of Japan, and the central banks of Canada and Australia as well.

Message of Gold

The competitive currency debasement can be seen in the price of gold and silver.

None of these central bank measures are doing a damn thing for the real economy (in the US or anywhere else), but it sure has ignited a fire in gold and silver.

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

Bernanke says Lawmakers Should Consider Rules on Fiscal Limits; Expect Hissy Fit from Krugman; Bernanke Pisses in the Wind

Posted: 04 Oct 2010 11:25 PM PDT

Proving that he far more of a Monetarist clown than a Keynesian clown, Bernanke Calls on Lawmakers to Consider Rules on Fiscal Limits

Federal Reserve Chairman Ben S. Bernanke called on U.S. lawmakers to consider rules limiting federal spending, annual deficits or accumulated debt to curtail the risk of a fiscal crisis.

"Well-designed rules can help promote improved fiscal performance," Bernanke said today in a speech in Providence, Rhode Island. A rule "could provide an important signal to the public that the Congress is serious about achieving long-term fiscal sustainability, which itself would be good for confidence," he said.

Bernanke provided one of his most detailed prescriptions yet for reducing the record federal budget deficit. He said in congressional testimony in June that unless the U.S. makes a "strong commitment to fiscal responsibility," the country in the long run will have neither economic growth nor fiscal stability.

"It is crucially important that we put U.S. fiscal policy on a sustainable path," Bernanke said at the Rhode Island Public Expenditure Council's annual dinner, where he was invited to speak by Senator Jack Reed, a Democrat from Rhode Island and member of the banking committee.

"The only real question" is whether adjustments to taxes and spending will come from a "careful and deliberative process" or from a "rapid and painful response to a looming or actual fiscal crisis," Bernanke said.

Bernanke cited Switzerland, Sweden, Finland, the Netherlands, Canada and Chile as countries that improved their budgetary performance by using fiscal rules. He didn't elaborate on what kinds of spending, deficit or debt limits would be best.

"I do think that the additional purchases -- although we don't have precise numbers for how big the effects are -- I do think they have the ability to ease financial conditions," Bernanke told the students.

Fiscal Sustainability and Fiscal Rules

The above excerpts are from a speech Bernanke gave at the Annual Meeting of the Rhode Island Public Expenditure Council, Providence, Rhode Island.

The speech was on Fiscal Sustainability and Fiscal Rules

Expect Hissy Fit From Krugman

Paul Krugman, flag bearer for the Keynesian clowns, is without a doubt having a hissy fit at the thought of any step, no matter how small, regarding Bernanke's statement "It is crucially important that we put U.S. fiscal policy on a sustainable path."

Krugman might object to that characterization, by claiming he is all in favor of fiscal prudence, but only after Keynesian stimulus leads to a full recovery.

The reality is Keynesian clowns in Congress and Monetarist clowns at the Fed have both wrecked the economy to a point that severe pain is not avoidable. Indeed, the unemployment rate and bank lending both say the economy is following a path of severe pain.

Monetarist Nonsense

Bernanke claims Quantitative Easing will "ease financial conditions." Forgive me for asking the obvious, but what the hell needs easing?

Mortgage rates are at all time lows in spite of the fact that housing itself is in the gutter and risk of default is high, junk bonds are back to par, and the ability for corporations to get financing for total garbage is at or near historic highs.

If anything, Bernanke has ignited a bubble in junk bonds. The one thing Bernanke has not done is ignite bank lending.

Bernanke Pisses In Wind

The problem Bernanke faces is low rates will not stimulate bank lending. I discussed why at great length in QE Engine Revs, Car Goes Nowhere.

The economy is stuck in neutral so stepping on the QE gas pedal is highly unlikely to accomplish much except increase the noise level. Yet, the philosophy at the Fed seems to be, if gas doesn't work, give the engine more gas.

Providing unneeded liquidity may or may not help asset prices (please see Sure Thing?! for a discussion) but if quantitative easing helped the real economy, at some point yields would stop falling.

Clearly the Fed has no clue as to what to do, but it wants to "do something". The only thing the Fed can think of doing (or is willing to do) is have another round of quantitative easing, so the Fed eases whether it makes any sense or not.

The simple fact of the matter is increased borrowing power or lower interest will not cause business businesses to expand. I have discussed this point at length in

$30 Billion Offer No One Wants - Small Businesses Hit by Deflation
Ass Backwards: Senate to Shelve Bush Tax Cuts for Individuals; House to Pass Small Business Tax Cuts
Response to Nouriel Roubini on "America Needs a Payroll Tax Cut"

Here are a few charts from NFIB Small Business Trends for September.

Prices Received

Actual Price Changes

Single Most Important Problem

The single most important problem is lack of customers. Access to credit is not even on the list. Small businesses don't want loans because they don't have any customers and prices they receive are falling like a rock.

This is deflation in action, and it is crucifying small businesses.

Floods Everywhere

The response from the Fed is to provide more liquidity. Hell, water is everywhere already. The action in corporate bonds alone proves it. Some think that liquidity will continue to flow into equities.

However, with junk bonds already at parity, it seems to me that gold and treasuries are a better bet.

Regardless, please note how Bernanke's policies have robbed those living on fixed income, now earning 0% on their savings.

Yet, here we go again, with another round of QE, another round that cannot possibly do anything positive for the real economy, but try we must because Bernanke does not want to appear like the powerless charlatan that he is.

Bernanke now attempts to distance himself from the Keynesian clowns, secure in the knowledge that Congress is highly unlikely to show any real prudence.

Calculated Risk Blasts Bernanke

It is very rare to see Calculated Risk take a hard swipe at anyone, let alone the Fed, but Bernanke managed to cross the line.

Please consider Calculated Risk's post Bernanke breaks promise, discusses fiscal issues

This speech isn't worth reading for substance (Ben Bernanke is clueless on budget issues), but it reveals something about Bernanke.

Bernanke never mentioned "PAYGO" when he was head of the Council of Economic Advisors in 2005. In fact Bernanke barely mentioned the deficit in 2005 - except in postive terms - even though the structural deficit was in place and the cyclical deficit was coming (because of the housing bubble).

Today he said:

Our fiscal challenges are especially daunting because they are mostly the product of powerful underlying trends, not short-term or temporary factors. Two of the most important driving forces are the aging of the U.S. population, the pace of which will intensify over the next couple of decades as the baby-boom generation retires, and rapidly rising health-care costs.

Weren't the baby boomers going to get older in 2005? Oh my ...

This is an issue that 1) is outside of Bernanke's area of responsibility, 2) he has promised not to discuss, and 3) he has zero credibility on. Enough said.

No Credibility on Anything

While Calculated Risk points out Bernanke has no credibility on fiscal issues, I point out that Bernanke has no credibility on anything.

Bernanke certainly did not see the housing bubble, he did not think the unemployment rate would get above 8.5%, he did not see a credit collapse, he never admitted the Fed's role in this mess, and he calls himself a student of the great depression but does not have a clue as to why it happened. I could go on, but I won't.

Instead I will point out that he is diving into fiscal issues when he said he wouldn't. That makes him a liar as well.

The irony in Bernanke's speech is that Congress really does need limits on spending.

The correct place to start would be a balanced budget amendment. That would stop needless warmongering and other stupidities like bank bailouts right up front before they even started.

Why Now?

In regards to Bernanke's new-found fiscal conservativeness, Calculated Risk asks "I wonder why? Well, he missed the housing bubble completely - but what about the structural deficit?"

The answer should be pretty easy to spot.

Bernanke, knows full well Congress is unlikely to act in any meaningful way. When they don't, and when a global currency crisis is well underway, Bernanke will point his finger and blame Congress.

Thus, Bernanke's statements are not about fiscal prudence, but rather all about absolving the Fed in general, and Bernanke in particular for the upcoming global financial collapse.

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

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Tuesday, October 5, 2010

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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